Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the FIBRA Macquarie First Quarter 2021 Earnings Call. My name is Kevin, and I'll be your operator for this call. [Operator Instructions]. As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Nikki Sacks. Please go ahead.

[Nikki Sacks]

Thank you, Kevin, and good morning, everyone. Thank you for joining FIBRA Macquarie's First Quarter 2021 Earnings Conference Call and Webcast. Today's call will be led by Juan Monroy, our Chief Executive Officer. And to answer any questions you may have at the conclusion of today's prepared remarks, we also have Simon Hanna, CFO.

Before I turn the call over to Juan, I'd like to remind everyone that this presentation is proprietary and all rights are reserved. The presentation has been prepared solely for information purposes and is not a solicitation of an effort to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events or otherwise, except as required by law.

Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call as well. If you have not already done so, I'd encourage you to visit the website at www.fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab.

And with that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Juan Monroy.

[Juan Monroy, executive]

Thank you, Nikki. Good morning, and thank you for joining us. On today's call, I'll discuss our first quarter 2021 results, provide updates on growth initiatives and capital position, along with our outlook for the remainder of the year. We continue to be encouraged by the resilience of our industrial portfolio in grocery anchored shopping centers. Overall, our first quarter performance was in line with our expectations as we continued with strong cash collections.

In our industrial portfolio, which now accounts for approximately 90% of our total NOI, we see encouraging industry fundamentals across both the manufacturing and logistics sectors. We remain well positioned to capitalize on these dynamics with our high-quality portfolio, select growth in development initiatives and disciplined capital management strategy. The underlying earnings in our industrial portfolio remains robust in U.S. dollars terms. However, it was slightly offset by strengthening Mexican peso on a sequential basis.

During the quarter, our retail portfolio continued to be impacted by the COVID-19 pandemic. From mid-December through to February 9, nonessential retail was closed in Mexico City and other major metropolitan areas by government directives to contain the spread of COVID-19. From the middle of the quarter, our nonessential retail portfolio tenants benefited from the easing of COVID related trading restrictions, which allowed for a broad-based reopening, supporting a more optimistic outlook for the remainder of the year.

In the first quarter, AFFO per certificate was MXN 0.56. When excluding MXN 0.14 per certificate of nonrecurring early termination income received in the first quarter of last year related to the Mexico City retail tenant who vacated, this represents a year-over-year decline of 8%. This decline was primarily due to the impact of COVID-19 driven rent discounts and elevated doubtful debt provisioning related to retail tenants. We are encouraged by the continued improvement in rent collections and stable portfolio occupancy. As of April 27, we collected 98.3% of consolidated base rents and consolidated occupancy was flat at 93.8%.

In the industrial segment, there are a number of tailwinds bolstering the Mexican industrial real estate market, including U.S. and Mexico trade growth, near-shoring and supply chain enhancements as well as increasing logistics demand. With this backdrop, we delivered solid operating results. Our industrial portfolio NOI was MXN 772 million, up 6.2% compared to the prior comparable period. This was driven by an industrial portfolio average annual rent rate increase of 3.6%. Partially offset by lower average year-over-year occupancy. The average rental rate increase was mainly due to contractual increases and positive leasing spreads on renewal leases.

In terms of expenses, repair and maintenance expenses increased compared to the prior year as we return to normalized levels. The overall solid market momentum for both e-commerce logistics and manufacturing for export is contributing to a favorable leasing environment in our core markets.

In the first quarter, we benefited from strong new and renewal leasing activity of 1.3 million square feet, including a 77% quarterly retention rate. For the year, expirations remain manageable at 13.5% of annualized base rent and 3.7% of tenants currently on a month-to-month basis. While improving, the retail environment remains challenging as COVID-19 continues to impact food traffic across the segment. Since reopening in mid-February, we are beginning to see a slow recovery in the Mexico retail sector. Through April 23, 88.3% of GLA and 90.5% of annualized base rent is open in our retail portfolio, a meaningful improvement from the prior disclosure of 70.5% of GLA and 68.1% of annualized base rent as of January 26, 2021.

This improvement provides a promising backdrop for our ongoing progress in rent collections. Retail portfolio cash collections of MXN 96.2 million was down 17% on a sequential basis, mainly due to rent discounts granted to nonessential tenants who were impacted by COVID-19 as a result of government-imposed trading restrictions, which remained in place through to the middle of 1Q '21.

Cumulative contracted rent relief now totals MXN 110.8 million, comprised of MXN 8.2 million in rent deferrals and MXN 102 million in rent discounts. As of March 31, we have provisioned for 91.1% of retail gross accounts receivable. However, we are encouraged by an outlook, which we are hopeful will result in progressively lower levels of rent relief.

In the first quarter, retail NOI was MXN 98.5 million compared to MXN 224.5 million in the prior comparable period. Excluding the impact of nonrecurring early termination lease income, this represents a 16% year-over-year change. FIBRA Macquarie's retail portfolio average rental rates were stable over the prior comparable period as contractual increases and positive new and renewal rental rate spreads were partially offset by the impact of small shop move-outs.

Occupancy at the end of the first quarter was 91.1%, down 200 basis points from the prior year and 36 basis points from the fourth quarter of 2020, mainly driven by additional vacancy arising from the impact of COVID-19. Despite these near-term challenges, we maintain confidence in our well-located defensively positioned retail properties and anticipated ongoing improvement as the year progresses alongside more widespread vaccination distribution.

Turning to development. We continue to pertinently pursue new development opportunities in our core markets, building on our successful development track record. As we have previously discussed, we currently have 2 Class A industrial projects in development. In Monterrey, we are continuing our pre-construction work on the first industrial building in the permanent industrial soft market of Apodaca, representing approximately 180,000 square feet of a broader multi-asset, 800,000 square feet development project.

We are commenced -- we also commenced works on our development project in the Mexico City metropolitan area where we intend to deliver more than 700,000 square feet of industrial logistics gross leasable area across 2 buildings with the first building scheduled for completion by year-end. We expect these investments will help to drive NOI growth in 2022 and beyond, and we continue to grow and evaluate a pipeline of development opportunities. We are also continuing to finalize our plans for our Mexico City redevelopment property, given the uniqueness of these assets in terms of its location and potential use in the market, we will pursue a path of redevelopment into an industrial use, and we look forward to providing updates as the project progresses.

Turning to our strong balance sheet. We have maintained a conservative approach to our use of leverage and remain well positioned. As of March 31, 2021, we had MXN 5.2 billion of liquidity, inclusive of our unrestricted cash and drawing capacity on our committed revolving credit facility and no maturities until 2023. We currently have a net debt-to-EBITDA multiple of 5.1x, and we continue to maintain a healthy debt service coverage ratio and comfortable headroom with respect to our debt covenants.

To ensure optionality to support our growth initiatives, our certificate holders recently approved the establishment of a shelf registration programs to efficiently access debt and equity capital markets. This program provides FIBRA Macquarie capability to efficiently conduct time-sensitive capital market transactions. I want to emphasize that there is no immediate intent to use equity at this time as we maintain an ongoing focus on maximizing returns on a per certificate basis and on the prudent use of leverage.

FIBRA Macquarie has a consistent track record of strong capital management, including the disciplined sourcing and deployment of capital.

Finally, we authorized a first quarter cash distribution of MXN 0.4750 per certificate. We're also taking this opportunity to reaffirm our guidance for AFFO per certificate of between MXN 2.27 and MXN 2.32 and full year distribution of MXN 1.90 per certificate. While we are comforted by the improving retail outlook, the path of recovery from the pandemic is expected to be gradual for retail portfolio.

We remain pleased with the resilience of our industrial portfolio as well as the growth prospects and favorable long-term fundamentals. We believe we have built strong foundations across our platform and are encouraged by our sustained performance. As always, I want to commend the entire FIBRA Macquarie team for their unwavering commitment and to everyone listening, for your ongoing support.

With that, I'll ask that, Kevin, open the phone lines for your questions. Kevin?

[Operator]

[Operator Instructions]. Our first question today is coming from Nikolaj Lippmann from Morgan Stanley.

[Nikolaj Lippmann, analyst]

Two questions, if I may. First, on your comment with the small shop move out. One, can you provide a bit of a color on who's moving in? Who has the balance sheet? What kind of tenant? What is the lease spread on those kind of tenants? So that's question #1. Question #2 on the shelf registration. If you were to issue new capital and engage in M&A, what will be the criteria? What would you be looking for? Would it be more on the retail? Would it be to expand into office? Or would it be in the industrial space? And how would you think about cap rates being accretive or not and valuation and those kind of issues?

[Juan Monroy, executive]

Yes. Hello, Nikolaj. Thanks for your questions. On the retail side, yes, we have obviously been impacted by COVID-19. And some small shops are -- have moved out, that has impacted our occupancy by about 100 basis points. And really, what we're trying to do is just work with our customers to support them where we can with the business models that we believe will be long-term winners in the near normal and also taking opportunity to work with new customers that might come into our properties. At this stage, really, there is not a whole lot of new leasing activity. We have, however, leased to new concepts that are well placed in the new reality, like for example, dark kitchens, in some very well located urban properties, challenge spaces within well located properties. Now we are leasing to our kitchen operators of well-known restaurant chains. So we believe that's an interesting trend that will provide for better use of the challenge spaces within well located properties. So that's one example of new type of tenants.

Obviously, our tenants are also adjusting to the new reality by providing proper omnichannel strategies and ensuring that they use a brick-and-mortar properties for the click and collect and to ensure that they provide adequate service for the end user. But reality, Nikolaj, is that at the moment, in terms of new leases, they remain fairly thin. The focus is on really stabilizing the occupancy, ensuring that the properties are operating as they shoot to increase foot traffic. Foot traffic has been increasing, but it remains below pre-COVID levels. So we'd like to see foot traffic increase, so we can now start to execute on new leases. When -- I believe that when you look at what's to come for retail, when you look at other more developed markets that are perhaps more progressed in terms of vaccination, you see that there is obviously a significant pent-up demand and a real need of the end-user to go out in restaurants and movie theaters, et cetera and are experiencing a very strong comeback. So we hope that we will see that. And in the meantime, we have a pretty defensive grocery anchored portfolio that we believe that will help us get through this pandemic.

With regards to the shelf registration program and your M&A questions around that. I'll just say, as I mentioned in my prepared remarks, we solicit approval from shareholders on this shelf registration program really to add an additional tool to our toolbox with the goal of having more flexibility when and if it makes sense. We have been very disciplined issuing and using capital lease on a disciplined manner, is something that we take extremely seriously, and is very close to our hearts. We're very focused on per certificate growth, and we will only consider issuing equity when it makes sense, when it's fair price, and when we have an adequate use of proceeds. At the moment, in terms of growth capital, really, the focus is more on funding our development pipeline. We are very excited about our development program in that we are being very disciplined, but opportunistic at the same time in buying irreplaceable land parcels, very well-located in core markets, in building Class A, the best product in the markets where we are operating, developing at fairly attractive yields. So that will be the intent to continue doing that. Obviously, we always scan the market also for M&A acquisitions opportunities. And as you know, we haven't really been active in the office sector. We really don't own much office. It's just marginal as part of mix use property that we own. So we don't intend to pursue office as we are a little bit concerned about the supply-demand dynamics. Similarly, we don't intend to pursue acquisitions in the retail space. And we will be open-minded about pursuing acquisitions in the industrial sector as we do like quite a bit industrial sector fundamentals.

In terms of cap rates for stabilized product, they've been fairly tight. And I'll say, from below 7% to between 6.75% to 7.5% is sort of what we've seen as of late. So pretty tight cap rate environment there. And I guess, we'll be open-minded if the pricing makes sense and if there isn't a strategic fit within our portfolio, and it's a good fit with our investment criteria. But yes, at the moment, we are really more focused on funding our development pipeline.

That was a long answer, sorry about that, but hopefully that clarify.

[Nikolaj Lippmann, analyst]

Yes, Juan. Can I ask just 2 clarification questions? On the operating question, you mentioned 100 basis points. Was that for the total portfolio or for the retail portfolio? So that's one. And then the second, you mentioned the concept of fair value of the certificates. Should I understand that as NAV that within a reasonable proxy of NAV is when you would consider this?

[Juan Monroy, executive]

Yes. On the first one, yes, I was referring to 100 basis points, and that was on the retail portfolio. Yes, on the retail portfolio exclusively. And yes, when I talk about fair price, yes, the reference point for us is always NAV, yes, good value. And as a reminder, our book value is MXN 34.2 per certificate based on our investment properties number that is in our balance sheet, using an external valuation number that has an implied cap rate around 8.4%. So based on the current private transaction cap rates, you can say that that's perhaps a conservative number potentially. But yes, that's always our reference point [indiscernible] also we look at that and not only that, the price, but also the use of the proceeds as well.

[Operator]

Our next question is coming from Andre Mazini from Citigroup.

[André Mazini, analyst]

My question is a little bit of a follow-up on capital allocation and what you mentioned. So when we look at the retail portfolio, a year ago, it used to be 19% of NOI. This quarter it was 11% of NOI, of course, closures still in the first Q and the COVID mobility restrictions account for a lot of that dilution. But going forward, as you mentioned, Juan, so probably no further investment in the retail portfolio, right? I think that's what you said in terms of the likely proceeds from a shelf. So how do you see the share of this portfolio, let's say, 5 years from now, it's going to be around 10%, flat, divestment is an option. How do you strategically see the retail portfolio within the broader portfolio, let's say, 5 years now?

[Juan Monroy, executive]

Yes. Hello, Andre, good morning. Thank you for your question. Listen, we actually -- it's early to say this now, but we do like our retail portfolio. It's a pretty strong portfolio. That's a defensive portfolio. Grocery anchored, very well located in the top markets of the country. So I do expect a pretty strong comeback. So yes, the focus for now, as I said, is a very proactive asset management, stabilized portfolio. And, yes, at this point, that's the focus. 5 years, that's a long period of time. But obviously the expectation will be for us to continue on our trend really to continue focusing on industrial, both manufacturing for exports and logistics. So I envision 5 years from now a portfolio that is really focused on industrial. We've got dual platform of both manufacturing for export, which is really the core of industrial real estate in Mexico, but also capitalizing on the growth opportunities in the logistics, both B2B and B2C as well.

[André Mazini, analyst]

Maybe a quick follow-up. On the industrial side, of course, you and the peers have exposures to the auto manufacturers. I think there was further production delays this month or this week because of the global semiconductor shortage. So do you think that can be a bigger problem for collections down on the road. I mean, do you think these tenants would use this as bargaining power for maybe not paying rent on time. It may be that's too harsh. But for some kind of short-term concessions given that their supply chains have been severely disrupted.

[Juan Monroy, executive]

Yes, it's an interesting issue, global issue on the semiconductors shortage globally. Hopefully not. We haven't seen any real impact yet at the operations for customers. We have observed certain OEMs shutting down operations for a week or 2. So that could have a bit of a disruption with our customers as well. I hope that that will be short-lived, and we are not expecting at the moment, really any rent concessions as we hope this will be hopefully short-lived. Hard to say. It's a real issue and a hard one to sort. But yes, we haven't seen any impact as of yet with our customers. So we are monitoring that closely. And if they're impacted, I will think that they will continue to operate in working around that microchip shortage. There is one positive thing that can come out of this, which is sort of, from my perspective, it does reaffirm the near-shoring trend, right? As we're seeing with all of these external factors from COVID to China to the Suez Canal blockage to now the microchip issue. These external factors are real and have real meaningful impact in supply chains or operating consideration. So I think this one will come to reaffirm the -- or accelerate the near-shoring trend. And in fact I read that the U.S., I think, plans to invest about $50 billion in R&D in trying to bring more of what traditionally has been production out of Asia, particularly in Taiwan, of these semiconductors. I think a lot of that might come to the U.S. and potentially Mexico could benefit partially from that as well.

[Operator]

Our next question today is coming from Gordon Lee from BTG Pactual.

[Gordon Lee, analyst]

A couple of questions. First, I was wondering if on the Mexico City conversion property that you have now decided you're going to do into a logistics space. I was wondering if you could give us a little bit of color as to the potential size and investment there and maybe the time. And then the second question, which is a follow-up on the conversation that you've been having on capital allocation. It's been a few quarters now since you've used your CBFI buyback program. And if I look at sort of implied NOI cap rates, they're looking -- for the stock, it look close to what development CapEx would be, but presumably buying your own shares is a lot less risky. I was wondering why you really haven't tapped into that lately and what your thoughts are on buying back CBFIs in instead of looking at expansion.

[Juan Monroy, executive]

Hello, Gordon. Thank you for your question. Yes, on the first one, pretty excited about our Mexico City property. It is a really irreplaceable asset, a very unique property, extremely well-located in the Southern part of Mexico City at the juncture of 2 main highways or material growths and in the northern infield area. So yes, excited about our plans to develop there, a last-mile logistics world-class property. The land size there is 27,000 square meters. We are pretty progressed with architectural drawings, and we will announce more about size of the property in terms of GLA et cetera when completed. But a pretty interesting project and we believe we'll start generating income no sooner than 2023.

And with regards to the buyback program, yes, we've been pretty active in the past with our buyback program. We recently went to our shareholders and got our buyback program reaffirmed or approved for 1 additional year for MXN 1 billion. So we do have that live program. We -- as you well noted, we have not been too active as of late, and that's really for 2 reasons: Number one, given the COVID pandemic that started last year, we were pretty conscious of protecting cash as much as we could. So it was a -- from that perspective, we wanted to make sure that we were conserving cash in an abundance, so for caution. The economics, as you suggested, make total sense when we're trading at these levels and when our book value is at 34 with an implied cap and that valuation in the 8.4%, it makes total sense. So we are very closely monitoring the opportunity and try to balance it as well with funding our development pipeline.

It's a tricky one, Gordon, for sure. If you look at exclusively the short-term economics, it makes total sense to buy back our shares. However, what we are trying to manage is sort of this balancing act between investing in long-term accretive, very attractive real estate projects with Class A product in core markets where we can develop at yields between 9.5% and 11%, which we think is very important for the long-term success of our business and trying to balance that with a very interesting proposition of buying back. So we're mindful of a trade opportunity there and that it makes sense. And we've been really just trying to balance between that buyback and developing. Simon, did you wanted to complement?

[Simon Hanna, executive]

Yes. Hello, Gordon. I think that was a pretty complete answer, Juan. I think the only thing to add there is on that equation as well just to consider leverage as well. And whilst we're sort of comfortable in the range we have at the moment, but obviously, looking at that capital allocation decision to buyback, specifically also, I guess, has the, I guess, the most impact on leverage relative to, I guess, looking the development program, for example. So that's the only other factor I will just flag.

[Operator]

Our next question today is coming from Froylan Mendez from JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

Two questions, if I may, please. First one, Juan, what would you need to increase guidance, let's say? You have said in the past that you expected to see similar impacts this year in terms of retail discounts. But do you think it is still a valid view considering what your retail tenants are asking in April? That's my first question. Second one is, could you clarify the CapEx requirements for the 2 projects that you have in preconstruction phase and the incremental GLA that we could expect in the short term?

[Juan Monroy, executive]

Yes. Sure thing. Thank you for your question. Yes, with regards to the first question, yes, I think that retail rent discounts could be one. We do see an environment where now or nonessentials that are allowed to reopen and operate, it's encouraging. But we've captured a lot of that in our LDE numbers already. So it's -- a lot of the impact that we assumed for this year, we've already sort of had that in Q1. We're still being impacted in Q2. Hopefully it will be less than Q1 and expect for that retail discounts to stabilize. Obviously, we're not assuming any acquisitions or development and we're assuming a stable FX. So yes, I guess for this year, I think that our guidance is accurate. We spent quite a bit of time in doing the bottom up analysis. And I think that given the results of Q1, I think that we're to a start to get to that full year guidance, but we're not anticipating really exceeding it at this time.

Simon, did you wanted to add?

[Simon Hanna, executive]

Yes. Again, I'll say that's right. I think apart from the discounts, obviously, the other thing that we're closely monitoring is the provision for doubtful debts and sort of ultimately the linkage there to cash collection. So we're still hoping that our retail improves from where we were in Q1 levels, that sort of 90% level, slight uptick from Q4 to be fair. But obviously, freedom from doubtful debts remains a sort of an above-average area compared to pre-pandemic levels. So that is, I guess, is closely watched and as key as the actual discounts themselves. And obviously, as we go through the year, we'll get better visibility on that as well as we go through that 14% of the expirations on the retail portfolio. So yes, a long way to play throughout the year. But hopefully with some of those metrics there, potentially, there could be room for improvement. And so let's see what we have this time next quarter.

[Juan Monroy, executive]

Yes. And with regards to your second question, Froylan, on our 2 development projects. As I said, pretty excited about those prime locations in Mexico City and Monterrey. And in Monterrey, located in the sub-market of Apodaca. And the remaining CapEx to invest for this year for both projects is about $27 million, $30 million if you include expansions as well, separate and apart from these 2 projects, $30 million to build in the Apodaca project, the infrastructure and the first building of 183,000 square feet. And also the first building in our Mexico City property of about 500,000 square feet. So for a total of about $27 million. The total GLA for our Monterrey property is about 800,000 square feet and for Mexico City property, 700,000, once both projects are completed.

[Fernando Froylan Mendez Solther, analyst]

And this should start contributing until 2022, right, those 2 first buildings?

[Juan Monroy, executive]

Yes, we intend to complete the first building in each of the 2 projects by the end of the year. And we typically assume a 6-month lease-up period. So yes, we anticipate that those buildings start contributing some time in 2020.

[Operator]

Our next question today is coming from Alejandro Chavelas from Credit Suisse.

[Alejandro Chavelas, analyst]

First one, on your lease spreads for the quarter. I saw that they were very strong. Do you think the activity in the industrial portfolio [indiscernible] was mostly concentrated in Northern Markets right now, et cetera [indiscernible]. Do you think we could see more leases, positive lease spreads as the year goes by and perhaps we have more leasing activity in Monterrey or Central Mexico? And what are you seeing in terms of rent growth for 2021, for 2022? What are you thinking about in terms of rent growth in the following years?

[Juan Monroy, executive]

Yes. No, you're right, a pretty tight market on the occupancy side, certainly, supply demand equation, Alejandro is supporting rent growth and very pleased with the 3.6% increase that we deliver in our rental rate increase in industrial portfolio with majority of our income being U.S. dollar denominated. So yes, I think that the low vacancy levels and just a whole supply demand, the question is really supporting for attractive rental rate growth. We're always a bit cautious about modeling too much north of ahead of inflation, but we've been observing that. So I do think there is upside potential in us continuing to potentially beat inflation. Logistics markets are demonstrating certainly a very aggressive rental growth like Mexico City. But also the other trend to keep in mind is that there is also a clear preference now for customers to enter into Mexican peso lease just for this type of product. So I think that we'll see -- continue to see fairly healthy rental rate growth significantly ahead of Mexican inflation in logistics markets like Mexico City, but also an increased preference for customers to do deals in peso. So we just need to take that in consideration. And in the northern markets, the vacancies is very tight, and we are continuing to manage to, on renewals, have positive spreads and continue to see increases in rental rates for new leases as well. But we're always cautious in terms of what we model, but I do think there is more chance of a positive surprise on the upside for rental rates.

[Alejandro Chavelas, analyst]

Perhaps just a follow-up on receivables and non-collectible amounts. Just to get a sensitivity there or some color, obviously, on collectibles increases or the provision increased a little bit this quarter. I was a little bit surprised about this because it was just 1 month lockdown or a little bit more than a month, January, perhaps a little bit in December. Do you think we could see a reversal of provisions for collectibles? Or do you think those are -- that provision will remain as it is?

[Juan Monroy, executive]

Yes. It's a good question. I think, I'm looking, to be fair, the provision number for retail actually was a little bit down compared to Q4, around MXN 12 million compared to MXN 15 million for Q4. I do think that when we look at where we are today, we have 91% of our retail receivables provisioned. That's pretty high on a historical basis. Just as comparison 2Q '20, we were at sort of around 80% level. So as a result, the net AR balance for retail has gone down from MXN 18 million to MXN 11 million. So it's hard to see that percentage coverage increasing too much higher from where we are today. And certainly I think that, yes, there's a good chance that we might see some of that release just because we've got such a high proportion covered. I'd also say that industrial is at a healthy provisioning level as well at 76%, net AR of MXN 24 million and again, sort of brought down that balance as well progressively through strong cash collections as well as prudent provisioning. So we also feel pretty comfortable. And just as a comparison, back in 2Q '20, net AR for industrial was actually MXN 95 million, MXN 66 million reflecting the deferred rents that were due for collection, and pretty much all of those up. So that balance has come down considerably from MXN 96 million to MXN 24 million over the last few quarters. And so I think when you look at both industrial and retail, on a consolidated basis, MXN 35 million net AR, 84% coverage. We do feel very comfortable on that. And I tend to think that if anything, yes, probably a little bit of upside risk in release going forward. But obviously, we'll continue to take a prudent approach as always.

[Operator]

Our next question today is coming from Eduardo Alvizouri from GBM.

[Eduardo Alvarez, analyst]

Sorry, all my questions have already been answered.

[Operator]

Our next question today is coming from Francisco Suarez from Scotiabank.

[Francisco Suarez, analyst]

You have the best possible distribution covers among all FIBRAs from many, many, many years ago. And so your distributions are never in jeopardy, in a way, I think. But can you elaborate a little bit on the above standard tenant improvements and extraordinary maintenance capital expenditures that you were disclosing this quarter and also on the maintenance capital expenditures. They were increasing quite a bit. Is this a trend that you expect going forward? Or this is just kind of a one-off?

[Simon Hanna, executive]

Yes, hello. It's Simon here. I think with regards to maintenance CapEx TIs, [indiscernible]. As you say, there has been a trend there and so of a pickup in the last couple of quarters. I would say nothing sort of materially beyond our expectations in terms of what we're doing. We've got a fairly rigorous bottom-up maintenance program, which is ongoing. And what I'll say there, there's sort of some key CapEx items there, particularly sort of roof replacement, fire protection, HVAC, some other items there, which are really just part of the ongoing maintenance requirements for the portfolio. So taking a step back and saying, well, yes, there has been an increase in the last year or so on that. Where we are today, I think it's around 14% of our NOI for industrial. Industrial is obviously sort of the key driver of this, 14% of NOI. We feel that -- and that's gone up a couple of percentage points over the last year, but we do believe that this current range in this sort of a quarterly normalized result. I think it's probably where we want to be going forward on a run rate basis at that sort of range. So we do feel that with some of these items, sure that there has been a little bit of an increase, but it's probably to a level which makes sense. And looking at the program ahead, we do think that Q1 is a good proxy for run rate going forward. The other item I will just flag there in terms of that mix of increase, the TIs have gone up, I guess, is the highest on a proportionate basis relative to maintenance CapEx and leasing commissions. And I guess, in a way, that's probably a good thing because it's the TIs themselves, which is subject to a specific leasing return. And so having the increment, I guess, covered by a little bit of top line growth as well is not the worst thing in the world in managing the split through increasing TIs relative to maintenance CapEx.

[Francisco Suarez, analyst]

Yes, it totally makes sense. Thanks for that clarification. And of course, considering that the overall absorption in industrial, this will sound -- it does make sense to have those, isn't it?

[Simon Hanna, executive]

Yes. Absolutely. So yes, so hopefully that answers your question.

[Francisco Suarez, analyst]

Yes. It definitely does. Can I just ask another question on your retail portfolio? I noticed that basically 12% of your annualized base rent is currently in [indiscernible]. How confident you are that that may actually return to normal leases rather than the month-to-month as such? And also on your retail portfolio, the dark kitchen that just opened, do you see opportunities to have more of those or any dark stores as well?

[Juan Monroy, executive]

Yes. I think that we are proactively working in regularizing those leases, not too concern. We don't take that lightly. We take it fairly seriously and are proactively working with customers. I'm not really too concerned about those. I mean, it's been hard during the COVID crisis just to engage with customers and for them to enter into the long-term agreements and to sign documents, et cetera, et cetera. The last month, I'll say that that has picked up in a meaningful way. And I'm not really too concerned about us working through the majority of those lease [indiscernible]. And yes, with regards to the dark kitchen concept, it was good, we made use of a below grade parking that we have in a very central area in Mexico City, really space below the ramp that gets you to the parking. So a creative use of the space there of a very difficult to lease space. And yes, I guess, many restaurants are exploring that concept. So I'll think that we'll have more, really is not something that will move the needle at all for us. But it's an interesting initiative and to see some of these underutilized spaces being leased at a fairly attractive rent.

[Francisco Suarez, analyst]

Yes. Very clever, if I may, because there is a portion of space that's not going to experience any kind of high demand, isn't it? It is not that you are substituting prime locations to these sort of things?

[Juan Monroy, executive]

Yes, exactly.

[Francisco Suarez, analyst]

Fantastic. And any room for dark stores as well?

[Juan Monroy, executive]

Yes. I guess, listen, what we do on a regular basis, just scan the market for both disrupting -- disruption risk and also ancillary income opportunities. And with technology and with the new reality post-COVID, I'm sure the opportunities for different type of income or ancillary income coming from new and different types of uses where the online and the physical world might be when they come to their collapsing. And as such, I think that given the location of our properties, we're well placed to really serve our customers both in the retail side and the logistics side to provide for adequate omnichannel strategies and delivery strategies to the end user. So we'll see. I mean, we are in constant dialogue with our customers and attune to what's happening in the technology front and in terms of customer preferences and end user preferences, and we'll be prepared to act and lease our properties accordingly.

[Operator]

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Juan for any further closing comments.

[Juan Monroy, executive]

Yes. Thank you, Kevin, and thank you, everyone, for participating in today's call. We look forward to speaking with many of you over the coming days and weeks as well as updating you again soon on our second quarter 2021 results. Thank you very much. Have a great day.

[Operator]

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