Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to FIBRA Macquarie's Fourth Quarter 2020 Earnings Call and Webcast. My name is Carmen, and I will be your operator for this call. [Operator Instructions] I would now like to turn the conference over to Nikki Sacks. Please go ahead.

[Nikki Sacks]

Thank you, Carmen, and good morning, everyone. Thank you for joining FIBRA Macquarie's Fourth Quarter 2020 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, our CFO.

Before I turn the call over to them, 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 offer 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 have 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 our website at www.fibramacquarie.com and download these materials. The 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?

[Juan Monroy, executive]

Thank you, Nikki. Good morning, and thank you for joining us. On today's call, I'll discuss our fourth quarter and full year 2020 results, along with our outlook for 2021. It goes without saying that 2020 was a year like no other. As COVID-19 brought widespread challenges, I could not be more pleased with the hard work and dedication of our team members throughout the year. And we'd first like to take this opportunity to offer them my sincere appreciation and gratitude.

Turning now to our fourth quarter results. AFFO per certificate was MXN 0.5940, contributing to a record full year per certificate result of MXN 2.5911, marginally exceeding the top end of our guidance. These results were slightly above our expectations, demonstrating the ongoing resiliency of our portfolio. Our results for the quarter reflect continuing improvements in key areas of the business, which have been of particular focus since the onset of the pandemic.

First, we continue to enjoy strong and improving cash collections, with 97.7% of fourth quarter base rents collected throughout -- through to the end of January and posting total cash collections during the quarter of MXN 1.1 billion, up 2.8% sequentially.

Second, concessions in respect of quarterly rents were down sequentially by 67% to MXN 15.6 million, reinforcing the meaningful downward trend of concessions granted across both our retail and industrial portfolios through the second half of the year.

And third, we closed the year with net trade receivables of MXN 46.2 million, down by 37% compared to the third quarter. Of the back book previously mentioned, strong cash collections as well as stepped up provisioning, we believe our ongoing focus on the prudent management of our net trade receivables, coupled with our enhanced reporting disclosures on relevant key metrics and through the delivery of a high-quality earnings result to our investors and to our broader stakeholder base.

Whilst we did indeed record a sequential decline of 2.9% in our quarterly AFFO result, this was mainly due to the strengthening in the peso for the quarter of approximately 5%. And we think it is also worth noting that with respect to underlying and AFFO performance, our fourth quarter results were in fact or strongest since the second quarter of this year in underlying U.S. dollar terms.

In the industrial portfolio, fundamentals going into the COVID-19 environment were solid, and we are pleased that with this backdrop, rent collections continue to be strong. Through the end of January, we collected 99% of scheduled Q4 rents and materially reduced the amount of concessions that we granted. In fact, concessions were down 87.4% from the third quarter and did not include any discounts.

To date, rent deferrals totaled MXN 93 million, and with the vast majority of these deferred rents already collected in 2020, we have topped MXN 11.8 million scheduled for collection in 2021, and we have a high confidence in collecting on these deferred rents given the successful rate collections that we experienced in 2020.

As of year-end, trade receivables net of provisions were MXN 30.7 million, 45% lower than the third quarter. For the fourth quarter, our industrial portfolio delivered NOI of MXN 779.7 million, up 8.4% compared to the prior comparable period. This increase was driven by the depreciation of the Mexican peso and contracted annual rent increases, partially offset by lower average occupancy. Average rental rates increased 2.5% on an annual basis, driven by contractual increases, new leasing and positive leasing spreads and renewal leases. Industrial end-of-year occupancy was 94.3%, down 162 basis points from the prior year, but up 34 basis points sequentially.

Looking ahead, we anticipate some earnings pressure from peso appreciation. Strong underlying fundamentals should continue in the Industrial segment. I am pleased with the leasing activity as our hard-working and diligent local leasing teams executed on 2.1 million square feet of leasing activity, including 6 new customers and a healthy quarterly retention rate of 87.3%.

In terms of our industrial development program during the fourth quarter, we've delivered a fully leased -- and fully leased our 217,000 square foot new industrial building in Ciudad Juárez at an attractive 11% cap rate. The 10-year U.S. dollar lease was completed with a global corporation and maintained a 100% occupancy rate for our industrial development projects completed to date. We are continuing to selectively pursue opportunities to invest in Class A assets in core markets, demonstrating strong performance and a positive economic outlook.

To that end, we are continuing preconstruction work at our development project in the Mexico City metropolitan area announced last quarter. We expect to develop more than 700,000 square feet of industrial logistics GLA on this site. Additionally, in December, we acquired a 20.6 hectare land parcel located in Apodaca, Nuevo Leon, and we expect to develop more than 900,000 square feet of industrial GLA on this site.

We expect to commence construction on both of these projects in the first half of 2021, and we expect these investments will help to drive growth in 2022 and beyond. Our retail portfolio -- in our retail portfolio, the impact of COVID-19 remains a headwind. Although we saw some key areas of improvement quarter-over-quarter, as of late January, 70.5% of GLA and 68.1% of ABR was open and operating.

Foot traffic at our centers have regained some lost ground during the second half of the year, but since the government enforced reimposition of trading restrictions in December, including in certain key markets such as Mexico City and Estado de México, we're now seeing portfolio-wide foot traffic at around 50% of prepandemic levels. And we anticipate it to continue at these levels while such government restrictions are in force.

With the ongoing high number of COVID-19 cases in Mexico, the environment for nonessential retail remains uncertain. In the fourth quarter, retail NOI was down 4.4% quarter-over-quarter. However, excluding the impact of noncash straight-line rent adjustment, NOI was, in fact, higher 15.8% versus Q3 2020, and 36.4% higher versus Q2 2020. This positive trend mainly reflects the tapering off effect of rental discounts, which adversely impacted fourth quarter income by MXN 11.7 million.

With respect to collections, we gained positive momentum in the fourth quarter with total cash collections up 24% from the prior quarter to MXN 136.6 million. Through January 31, 89.2% of scheduled fourth quarter rents have been collected, a slight uptick from third quarter collections of 87%. Total rent concessions in the fourth quarter were lower by 49.8% when compared to the third quarter, and cumulative contracted rent relief now totals MXN 81.6 million, comprised of MXN 8.2 million in rent deferrals and MXN 73.4 million in rent discounts.

While rent relief has improved, we still continue to take a prudent approach to provisioning for doubtful debts. As of year-end, we have provisioned for 87% of retail gross accounts receivable. Retail occupancy at quarter end was 91.4%, a decrease of 69 basis points from the end of the third quarter, driven primarily by tenants in the small shop category who have been most impacted by COVID.

Despite the challenging retail environment, we were still able to achieve a modest gain of 60 basis points over the full year for our retail portfolio same-store rental rates. As mentioned earlier, with a recent increase in the spread of COVID, additional restrictions on nonessential businesses were imposed in late 2020 and have continued. We do not know exactly when these restrictions will ease, and we anticipate that extended closures and limitations could lead to an increased need for rent relief.

Despite these near-term challenges, we maintain confidence in our well-located, defensively positioned grocery-anchored properties. Furthermore, in select cases, we are preparing for a recovery and are continuing limited remodeling work for better position of our centers for the future. We completed remodeling work at the Coacalco Power Center and have begun remodeling work at City Shops Valle Dorado. Both properties are located in the core retail market of the Mexico City metropolitan area, and we anticipate that the work to refresh the properties will be positively received by both tenants and shoppers.

Turning to our strong balance sheet. We have maintained a conservative approach and continue to be firmly positioned. As of year-end, we have liquidity of MXN 5.8 billion, including our undrawn credit facility. Our MXN 15.8 billion of outstanding debt is fully fixed with no maturities until 2023. Our net debt-to-EBITDA multiple of 4.6x was stable and unchanged from the prior year.

We also authorized a fourth quarter cash distribution of MXN 0.4750 per certificate, bringing our full year distribution to MXN 1.90, representing a 6.7% increase over the prior year. We are proud to have achieved such an accomplishment given the challenges of 2020.

In terms of capital deployment, we have begun deploying capital toward 2 industrial development projects in the Mexico City metropolitan area and Monterrey, as previously discussed. As we have demonstrated throughout our history, including our recently successfully delivered Ciudad Juárez project, we will be thoughtful in light of the current environment, but also opportunistic with select growth opportunities.

I would also like to note a few highlights with respect to our sustainability initiatives. Our commitment to ESG is a fundamental element of FIBRA Macquarie's mission. As part of our accountability to continue making meaningful improvements, we participate in GRESB, and we received our 2020 score during the fourth quarter. We are proud to announce that we were awarded 3 green -- GRESB Green Stars, an improvement of 1 star versus the prior year and are now rated above our peer average.

We also pursued green building certifications under 2 of the leading programs, LEED and BOMA BEST. I'm also excited to confirm LEED certifications for 2 new Ciudad Juárez developments, including a gold rating for the most recent completed project delivered in the fourth quarter and a BOMA BEST bronze rating for all 6 of our submitted retail centers, representing a first-time green building certification for retail centers. There is a great deal of analysis and work that goes into achieving these certifications. And the only way we can achieve these results is by including sustainability objectives into all elements of our strategy. We look forward to providing additional details in our updated sustainability report to be published later this year.

Finally, with regards to our guidance for 2021, we anticipate FFO per certificate of between MXN 2.27 and MXN 2.32. This FFO guidance includes our expectations for solid underlying performance in our industrial portfolio in U.S. dollar terms. Given the main dollarized composition of our FFO, we maintained a high degree of sensitivity to exchange rate fluctuations. Expected strengthening in the peso from an average rate in MXN 21.5 in 2020 to MXN 20.0 in 2021, negatively impacts our full year FFO results by approximately MXN 0.17 per certificate.

In addition, our 2021 guidance assumes no income contribution from the prime Mexico City retail property that was vacated in the first quarter of 2020. The full year income contribution in 2020 from this property was approximately MXN 0.14 per certificate. Another important factor to note is that we also anticipate ongoing COVID-related pressures on our retail portfolio, as the recent wave of nonessential store closures will continue to be a headwind for the many businesses and, in turn, potentially on our customers' ability to pay contracted rents. And as such, we have prudently included a lost income allowance in our 2021 guidance that is properly in line with the consolidated impact that we saw in our 2020 results of MXN 0.17 per certificate comprised of rent discounts and continued elevated levels of credit receivable provisioning.

We consider these to be prudent assumptions in the buildup of our guidance and, as always, we will, of course, provide you with regular updates on our full year outlook as we progress through the year. We expect to maintain our distribution of MXN 1.90 per certificate consistent with our 2020 distribution in peso terms, but representing a meaningful 7.5% increase in U.S. dollar equivalent terms based on the assumed appreciation in the average peso from MXN 21.5 to MXN 20.0 against the U.S. dollar.

Although there are a few distinct challenges this year, we are encouraged by the stability in our industrial portfolio in grocery-anchored shopping centers. We look forward to our industrial government projects, which should provide growth going into 2022 and monetizing additional land development opportunities over time. We are encouraged by several recent growth developments, including the rollout of the COVID-19 vaccine, increasingly stable relations between Mexico and the U.S., and near-shoring manufacturing and logistics demand, all of which provide for compelling long-term tailwinds.

Thank you for your continued interest and support. With that, I'll ask Carmen to open the line for your questions. Thank you.

[Operator]

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

[Gordon Lee, analyst]

A couple of questions, 3 actually, if I may. The first is, I was wondering with the delivery -- with the successful delivery of the properties in Ciudad Juárez and what you -- the progress you've made in the Mexico City industrial property and, obviously, now the Apodaca development, I was wondering if you could remind us what yield on costs you're seeing on development? At least what you saw -- some roughly for Ciudad Juárez and whether we should expect something similar for Mexico City and Apodaca or development capital, whatever metric you prefer.

The second question was on the profile, the lease expiration profile for this year. I was wondering if you could let us know whether that's evenly distributed for the year or are there certain quarters that are a bit more relevant than others? And finally, and I guess this is more of a question for Simon, but I noticed that the peso value of your investment portfolio declined by around 8% quarter-on-quarter. Is that all FX? Or were there some markdowns to perhaps in the retail portfolio in pesos as well?

[Juan Monroy, executive]

Thanks for your questions. Yes, with regards to the yields on cost on our development program, it's somewhere between mid 9s to, say, 9% to 11%, 11.5% in -- our recently delivering full lease project in Juárez, we achieved a development yield of 11%. And the last building just completed and a bit higher in the earlier building. I think that's probably a good guide for what to expect in the future, between 9%, 9.5% to 11%, with Mexico City being a bit tighter than other markets.

I think in Apodaca, we'll be achieving something around 11%, consistent with Juárez in Mexico City perhaps in the lower end of that range. So obviously, very focused in our core markets, markets where we see strong fundamentals with a positive momentum in terms of strong demand and a good balance between demand and supply.

So yes, I guess that's that. With regards to the lease expiration profile, nothing too different from what we've done in previous years. It's somewhat of a smooth or evenly distributed expiration profile throughout the year. So nothing too relevant there to -- yes, to report, Gordon. And lastly, with regards to valuation, there is a little bit of FX impact, but also a meaningful markdown on retail properties as well in connection with current product challenges. Simon, do you want to add something else?

[Simon Hanna, executive]

Yes. No, that's right. So yes, just to follow up on that, we did see the full year independent appraisal update for December 31. That followed a June 30 update from an independent appraisal. And so with the concluding update for the second half of the year, we did see some further decline in retail. But overall, actually, industrial was up for the full year in dollar terms. But part of the movement that you did see for the fourth quarter, Gordon, was on the FX as well. We put the peso appreciation impacting that.

[Gordon Lee, analyst]

That's super helpful. If I could just have 1 quick follow-up on that last question, Simon. If you were to look at your retail portfolios, what would you say the markdown has been, let's say, since the peak or since the end of last year? On average, on a per-square-meter basis, if you had a sort of guesstimate.

[Simon Hanna, executive]

Yes. Look, based on what we're seeing through the independent appraisal process, we're seeing around a 19% mark down for the full year, from December 31, 2019. So that's the sort of the average impact, if you like, across the retail portfolio. And then for reference, when you look at that for industrial, we actually saw a step-up on a same-store basis of around 0.6% in U.S. dollar terms.

[Operator]

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

[Alan Macias, analyst]

Just one question. If you can provide the percentage of GLA that was felt in January in the retail sector. And have you -- are the guidance and discussions to give the discount to the space that was closed?

[Juan Monroy, executive]

Alan Macias, give me 1 second. Sorry, I just didn't...

[Simon Hanna, executive]

Yes. I think, Alan, your question was with regards to the percentage of GLA that's closed at January. So we've disclosed that in Slide 15 of our supplementary information pack. And when you look at that on a GLA basis, we have actually about 17.5% open. So it's just under 3% closed. And on an ABR basis, it's 68.1% open. So we did see that, obviously, come down a bit through the fourth quarter, given that we did have those additional closures, particularly in the state of Mexico and Mexico City metropolitan area.

And sorry, we just missed the -- was there a follow-up question as well to that?

[Alan Macias, analyst]

Just, Simon, I asked discounts for January, for the space that was closed?

[Juan Monroy, executive]

Yes, it's a fairly fluid situation, as I mentioned earlier, with the recent lockdowns imposed again in December. We are seeing stress among some of our tenants. So yes, we've continued to have discussions with some tenants, much less than before as we work through most of the portfolio. But, yes, in January, we've had a handful of discussions with some customers that are struggling as a result of the recently imposed operating restrictions headline.

[Operator]

Our next question comes from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

So to be honest with you, it was hard to understand the 10% decline in AFFO that your guidance for this year implies, especially considering the recently delivered properties and the lower debt. I'm curious as to why not including the Mexico City vacant space into your guidance?

And the second question would be, the assumption of a similar COVID impact in your P&L for this year, is it more related to items or negotiations that were already closed in 2020, but have not been reflected yet in your balance sheet? Or how much of this impact that you expect is from incremental stuff or recent conversations with tenants?

[Simon Hanna, executive]

Yes. Thanks, Froylan. It's Simon here. Look, I think the 10%, you really need to look at the -- I guess, we finished the year with a MXN 2.59 for the full year. And then there's really 2 key impacts. You have FX moving from MXN 21.5 to an average of MXN 20. That's around a 7% movement there, which is -- given our current composition of currency for AFFO, that's around MXN 0.17 of those to get off the bat.

And then secondly, the other key factor there is on that Mexico City property, as you noted, the -- we had for the full year in FY '20 income contribution of around MXN 0.14 per certificate. We aren't assuming any income for FY '21, as you note. Yes, that's potentially a touch conservative. There was to be some sort of re-leasing opportunity that comes out through the year. But given that we are undertaking a fairly comprehensive assessment of that property, I think at this stage, it would be bullish to be putting any income into the FY '21 bucket. So those 2 adjustments, the MXN 0.17 on FX and the MXN 0.14 on the Mexico City property, they more or less get you in line with the guidance that we have at the moment of MXN 2.27 to MXN 2.32.

And then with regards to the ongoing lost income. So yes, we noted that the impact in FY '20 was around MXN 0.17 per certificate. That's a combination of both increased provisioning for doubtful debts as well as the rent discounts, which we won't be getting back. So we are taking somewhat of a similar number as part of our FY '21 guidance. In terms of what's actually locked in at all today, it's actually very minimal. We don't have all that much in the form of contracted discounts for FY '21. But given the significant shift we've seen, obviously, with the COVID surge and the new round of government restrictions in some of our key markets, we wanted to be prudent and building some buffer there, and given that we obviously have a very challenging period in front of us.

[Operator]

Our next question comes from André Mazini with Citigroup.

[André Mazini, analyst]

My question is on the maintenance CapEx. There's a line called extraordinary maintenance CapEx. And I wanted to understand on how should we think about this on a going-forward basis. Would maintenance CapEx be something like 5% of NOI? Is that the ballpark figure that makes sense?

You guys think you can -- you would have to be a little bit higher than that in the short-term because of some things that need to be done. So how should we think about maintenance CapEx? And also, what is expense and what is capitalized? Because I think some maintenance CapEx diminished in the line, right? So that was probably expensed and what is capitalized that you caught the need for those?

[Simon Hanna, executive]

Thanks, André. Yes. Look, I guess just taking the first part of the question up top. So yes, we have seen an increase in total maintenance CapEx, 5 items, including TIs and leasing commissions. When you look at the total normalized AFFO adjustment items, we're up around 13% for the year. Worth noting, a lot of those items are in dollar denominations, and we have seen full year depreciation of 12% for the year as well. So I think chunk of that has to do with FX. But fair to say that we have seen a step-up over the last couple of years.

That extraordinary CapEx that we did see this year, that effectively is to do with unscheduled major works, which may arise because of our certain accidents or natural disasters, et cetera. So we had a similar level last year of around MXN 10 million. That number will hopefully stay as low as possible given that these are of unscheduled nature. But I don't think we should be expecting any sort of increase in that going forward, given that, as I say, they hadn't really a 1 or 2 or 3 expenditure events throughout the year.

When you look at the total maintenance CapEx and TI profile for the full year, it's around MXN 0.50 per square foot per annum for the Industrial portfolio. So, yes, we've seen that number come off a little bit over the last couple of years, partly FX as I say, and then partly just reflecting quite a solid program that we have, ensuring we have the properties maintained at the optimal condition, pretty active roof replacement program, painting, skylighting. It's fairly comprehensive.

So that number, I think, fair to say, we should expect it to be somewhere around that run rate going forward, around the MXN 0.50 per square foot. Obviously, it will go up or down according to the expenditures throughout the year. But I think it's a fairly stabilized number at these levels.

And then just in terms of what's capitalized and what's not. I think the other component that we have is repairs and maintenance, which is more sort of, I guess, shorter-term-type expenditure. That repair and maintenance is included in our NOI. That runs at around MXN 0.20 per square foot per annum based on Q4 run rate. So that's obviously how we write P&L. And then most of the below-FFO items that maintenance CapEx, TI, DLCs, they are capitalized. And in the case of TIs and leasing commissions, they're also amortized, but that amortization is excluded from the AFFO results. So hopefully, that's clear.

[Operator]

Our next question is from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

Juan, Simon, Andrew, my question is regarding the noncollectibles that we saw in the quarter. We saw an important increase quarter-on-quarters for the retail portfolio. So can you remind us what's the methodology to account for these noncollectible amounts to understand better what you saw in the quarter that led to the significant quarter-on-quarter increase?

The second question would be about developments. And it's good to see you adding to the development pipeline. On the other hand, it seems that you are at a loan-to-value of around 38%. So I'm wondering up to what level you are willing to bring your leverage. Well, still growing your development pipeline. And [indiscernible]

[Juan Monroy, executive]

Yes. Go ahead, Vanessa. Go ahead, Vanessa.

[Vanessa Quiroga, analyst]

Regarding the renewal rate, it's 78% in industrial, which is slightly lower than in the beginning of the year. So if you can give us some color, some insight on what you're seeing in terms of the renewals.

[Juan Monroy, executive]

Yes. [Foreign Language] Vanessa, thank you for your questions. So I'll leave the first one to Simon. In answering the second question on development, yes, our LTV is at a comfortable level, around 37%, 38%, which we don't -- we aligned, as I expressed before. We do have, I think, an active development pipeline in -- it's always been very disciplined and prudent with regards to our capital allocation, but we're seeing important investment opportunities that are accretive and create long-term value for our investors. So we are opportunistic in taking action, considering the very strong industrial fundamentals that we think that has long legs for the long term.

We anticipate, as we have expressed before, getting to develop about 1 million, maybe 1.5 million square feet of GLA per year. And it can be bumpy in terms of the cash requires you need to first acquire land. And then obviously, you contribute assets that reval -- with a reval gain, which is obviously a positive in terms of delevering. So we'll be prepared to see or I think that we can fund our development pipeline via a combination of retained AFFO revolver and selectively opportunistic asset sales.

So within all that, we do anticipate potentially the -- those will be coming up a little bit. But we wouldn't go to a level that will be uncomfortable to us. As a reminder, at some point, we were at around 46%. We don't intend to get to those levels at all. But putting efforts aside, maybe we can get towards 40s on a short term, low 40s on a short-term basis, Vanessa.

With regards to industrial retention, it was, for the quarter, was actually not -- the value was around consistent with our historical average. The numbers that I have are north of 80%. Actually, 78%. Actually I have 87% for the quarter and for the last 12 months is not too different from the historical average. So we continue to see, Vanessa, a fairly healthy demand levels across most of our industrial markets. So nothing to report on retention there. In fact, I think, it was actually good. Simon, you want to take the first question?

[Simon Hanna, executive]

Yes. Vanessa, with regards to the retail provisioning for doubtful debts and the AR, just as a reminder of the policy approach there. We have, as a general approach, to have an aging of provisioning. So essentially, there's a linear expansion as you get to an aging of 90 days. That's where we would reach 100% of provisioning. So that's a sort of a typical approach that we've applied before COVID and through to today.

On top of that, during this enhanced -- or I guess, this pandemic period, we have also done a case-by-case analysis on where we feel that there is a probability of noncollection greater than 50%, and we've accelerated that provisioning to be 100% regardless of aging. So those are the, I guess, the enhanced provisioning that were stepped up for this period. The outcome of that is, obviously, you have seen the higher provisioning levels throughout the year in the retail NOI. So obviously, that's not great as it is a drag. But, yes, that -- I guess that's just part of our disciplined reporting where we do want to ensure there's a quality of earnings there. And with that step-up provisioning, what we have been able to do is also step up the percentage of gross AR that has been provisioned. So that's actually gone up steadily from 2Q to 3Q and then 3Q to 4Q, where we're right now at around 87% of gross AR provision for retail and net receivables of just over MXN 15 million, which is relatively immaterial in the overall scheme of things. So that's helped to derisk future earning profile, if you like.

I guess it has been good on the other hand, to see cash collections coming up throughout the year as well in retail with the tapering off of the rent discounts as well. So retail cash collection for the quarter actually up on a total basis, 24% from the third quarter. And that was after the third quarter stepping up to 37% from the second quarter. So increasing trend of cash collection there for retail. But obviously, we're keeping a close eye on that accounts receivable balance and making sure we've got the right level of provisioning.

[Operator]

Our next question is from Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I -- my question is regarding the portion that your portfolio is expiring next year. What, in general, are the level of rent, the increased rents, versus the market rents? Should we expect a minor positive rollover rent? Or they are in line perfectly? That's it.

And my second question would be kind of a follow-up to Gordon's on the project that you have in Apodaca. What is your estimate on the construction cost per square foot that you are estimating for this project?

[Juan Monroy, executive]

Yes. Thank you for your questions. Yes, with regards to the exploration profile for next year, as I mentioned, nothing that we're too concerned about fairly consistent with historical profile. And in terms of opportunities to increase rent, I guess, potentially, the current rent versus market is very, very similar. And then obviously, when you get into the specific situation of each of the tenants, there is 2 impacts of the investment -- existing investment in the building, et cetera, et cetera. So yes, for our own purposes, we are -- we're not assuming -- I mean, really never do any meaningful increase in rental rate, just consistent growth -- growth with inflation. So I wouldn't expect any major movement in either direction on that front, Pablo.

With regards to construction cost for Apodaca, it varies on a building-by-building basis. But excluding land, purely construction cost will be somewhere a bit below $30 approximately. And then on top of that, as we need to add line cost and TI and infra, infrastructure investment in the park. So that number is on the actual construction for the building. So yes, that's that.

[Operator]

Our next question comes from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Thank you. Thanks for the public disclosures you guys provide and congrats on the sound collection. That was amazing, and it seems that your underwriting is actually working very well. Essentially on underwriting, risk underwriting. And this is actually a follow-up on your entrance to the logistics markets in Mexico City.

Considering how advanced the overall cycle on logistics is in Mexico City, how confident you are that your returns that you are targeting, and thanks for disclosing that, are going to be actually risk -- on a risk-adjusted basis are going to be compelling for your case on entering Mexico City? In other words, what are the risks of not getting the right tenants with the right quality that might be consistent with the returns that you're expecting in Mexico City?

[Juan Monroy, executive]

Yes. Francisco, thank you for your question. Good one. Yes. But the logistics market is not new to us. Obviously, we have a much larger lot manufacturing market -- sorry, portfolio. But we've been in the logistics Mexico City market. Since our inception, we have a number of properties in Mexico City in -- around the airport, et cetera, et cetera. So we know the market well. And in terms of the cycle, personally, I believe it's actually early stage, right? I think that when you started, for example, the U.S. industrial market, you'll see that most of the growth over the past 5 years has been driven by e-commerce.

Personally, I believe that in Mexico, it's just the very early innings of that, of a trend that was a very slow trend that we had experienced in terms of e-commerce logistics over the last couple of years. However, that has been accelerated meaningfully in connection with COVID. So I think pretty early innings in terms of the cycle for logistics in the city from my perspective, Francisco.

And as I mentioned, we see underwrite for lower development yields in Mexico City compared to a Juárez, for example. We really like and will continue to develop a product, like manufacturing products in our core markets, as we've been doing. We'll continue doing that. I don't think that they're necessarily exclusive, one from the other. So we see it more as an opportunity really for us to complement our offering, invest dollars at real attractive yields. And on a risk-adjusted basis, obviously, you need to consider that also cap rates on stabilized product for Mexico. So the buildings tend to be tighter. So the overall life cycle total return profile of a logistics development is fairly attractive.

And we believe that with the quality of the product that we're building, which is top-notch, second to none, really would have the opportunity to buy a irreplaceable land parcel in Mexico City. I think that we'll be very happy and proud with the results that we'll deliver when the buildings on the project is completed. And the strategy is to continue developing in logistics, including Mexico City, Monterrey and Guadalajara in addition to our light manufacturing focus as well. Hopefully, I answered your question, Francisco. Thank you.

[Operator]

And our last question is from Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 quick questions. So first off, I wanted to touch upon the guidance again. So understanding that 4% decline in USD for the AFFO per share is mostly driven by the empty office building. But you are increasing implicitly your AFFO payout by about 10 percentage points at about 82%. So my 2 questions are, if you were to fill out that building immediately, does that mean that we -- you will basically see guidance flat for the year?

And what would that mean for the AFFO payout? Would you keep it at the same level or would you raise the dividend? And then the second question is around -- the colors around your bullishness for the industrial portfolio, particularly focused on manufacturing. So how much of that is driven by onshoring? How much of that is driven by an American economy that's accelerating? Just a little bit more color as to what the dynamics are there.

[Juan Monroy, executive]

Yes, a few things there. So yes, with regards to the way we're thinking about our guidance and if we were to lease the Mexico City property, et cetera, yes, the AFFO payout ratio, as you correctly noted, has increased. I think that we are -- given our historical prudent strategy, we are able to maintain our dividend with no problem at all, given the ample dividend coverage that we have or higher AFFO payout ratio for this year is something that we think it's temporary. We do see a very clear path to get to AFFO payout levels similar to what we've experienced in the recent past in the mid-70s. If we were going to release or if we were going to see a important depreciation to the peso, obviously, that will have a positive impact on our AFFO.

And what we could do in terms of dividend, et cetera, I guess that's just speculating. I think that what I'll say is that what we anticipate is in the not too distant future, getting back to an AFFO payout level in the mid-70s. So I guess, based on that, we'll make adequate adjustments to provide for us. And I know there was a lot there. So Simon, feel free to chime anytime if I'm missing any of the questions from Jorel.

In terms of the -- our view with regards to the industrial sector, Jorel. Yes, we are not fairly bullish. I think I've actually said publicly that I like the fundamentals, but better post-COVID than pre-COVID really, and we saw our fundamentals that, I believe, that are here to stay with us for the long term, and those include near-shoring, logistics from e-commerce, business-to-business and business-to-consumer.

Now obviously, also the expected growth of the U.S. economy as well with all of the dollars that are going into the economy. The -- also the very important trend of increased resiliency that global companies are looking to build into their supply chains that, obviously, over the long term, will require additional GLA and I think Mexico is just very well positioned to be a very attractive player in the global context for both manufacturing and now the emerging logistics/e-commerce trend is a very powerful one, obviously, as well.

I don't know if I missed anything, Simon. Is there anything that you like to complement?

[Simon Hanna, executive]

Yes. I think just the other aspect there, Jorel, I think was the aspect on how much of that is coming through reshoring versus like this -- the in-place GDP from the U.S. It is fair to say that the bread and butter for our manufacturing for both tenant base, it's really the existing linkage to the U.S. GDP. So I think that will remain the case for a while to come.

The reshoring is definitely there. It -- we are definitely seeing data points on the ground. But I would think it's fair to summarize that it has a marginal impact in terms of the incremental leasing activity that we have seen so far in our own portfolio. There have been a few leases there. But the -- for sure, the main driver of the leasing activity that we are seeing is really to do with the existing economics.

[Wilfredo Guilloty, analyst]

And 1 more question, if I may. On the margin for onshoring, is there a particular industry that you're seeing increasing demand chatter interest that is worth noting?

[Simon Hanna, executive]

Yes. I think probably the 2 that I'll call out, as the top 2. Auto parts, I think, is a big beneficiary of the -- in particular, the USMCA step-up from 62.5% to 75%, so for the regional concept. I think auto parts is definitely prominent. And then in electronics, I think, as well through -- yes, particularly, I think, through some of the U.S.-China trade dynamics, we are seeing, I guess, more activity around electronics, generally speaking.

[Juan Monroy, executive]

Yes, that's right. But I'll -- I think it's a really a much broader concept here. I don't think that will necessarily be specific to 1 or 2 industries. I think that this is a more of a economic/trade issue that is pushing really companies across the spectrum of the different industries from electronics, medical equipment devices, auto, et cetera. So I think it will be really across the board. But yes, we've observed quite a big electronics and auto parts. But I think it's a positive trend across board there.

[Operator]

Our next question is from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is regarding retention rate on the commercial segment. What can we expect for retention this year? During fourth quarter, that number came down to 50%. So do we expect a similar number?

[Juan Monroy, executive]

Thank you for your question. Yes. Tough one to answer, really. Yes. I'll answer in saying that I think our portfolio is extremely well positioned, highly offensive. All of our properties are grocery-anchored, very well-located in Mexico City and so in Monterrey and Guadalajara. So very good locations for the long term. Obviously, at the moment, given COVID, they are also being impacted with the nonessentials. But supermarket sales continue to be fairly strong.

So I think that we will see, in my gut feeling, really depends on what happens with the vaccine rollout. I do think that we'll see a little bit of a shift on the small shop space, maybe starting with restaurants, I think that some of those names will have to recycle out, unfortunately. We are being a pretty conscious [ plan ]. We're in working with them and trying to support those customers that we believe have business models that are winners for the long term, but are others that might need to fall off. So as such, we might see a short-term recycle of some particularly small shop tenants.

But I guess I'd say as much as I can say, I think that fast forward post the vaccination program being executed, I think that's a pure portfolio. So winner given the fact that our properties are grocery-anchored, we're very well-located. And I think they're very defensive and winners for the long term. However, I do anticipate a bit of a short-term issue. And how much of that will roll, how much we will renew, I think it's very hard to answer given that it's directly related to the vaccination rollout and the operating restrictions that are imposed by authorities.

So yes, we'll see how it goes over the next few months and I'm sure next quarter, we'll be able to give you additional color on how we're doing on that front, Francisco.

[Operator]

And there are no further questions. I would like to turn the conference back to management for any closing remarks.

[Juan Monroy, executive]

Yes. Thank you very much, Carmen, 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 first quarter 2021 results. Thank you very much, everyone. Have a good day.

[Operator]

And the conference is now concluded. Thank you for joining our presentation today. You may now disconnect.