Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to FIBRA Macquarie's Fourth Quarter and Full Year 2021 Earnings Call and Webcast. My name is Darryl, 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, Darryl, and good morning, everyone.

Thank you for joining FIBRA Macquarie's Fourth Quarter and Full Year 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, our 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 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 this call as well. If you have not already done so, I would encourage you to visit our website at www.fibramarquarie.com and download these materials. A link to these 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 2021 results, provide updates on our growth initiatives in capital position and introduce our outlook for 2022. FIBRA Macquarie delivered another quarter of strong performance to finish the year, continued the strength in our industrial portfolio and positive momentum in our defensively positioned grocery-anchored retail portfolio allowed us to realize AFFO per certificate growth of 4.2% in the fourth quarter and post a full year AFFO per certificate results of MXN 2.38, $0.04 above our revised guidance. In addition, supported by favorable market dynamics, we are continuing to invest in accretive growth opportunities as we pursue our disciplined industrial development strategy with 3 buildings in process and an active pipeline of relational opportunities. In discussion, our full year 2021 results, I am pleased to report a meaningful increase in our property valuations across both the retail and industrial portfolio. The valuations carried out by an independent appraiser, CBRE, delivered a full year revaluation gain of 12.4% in our industrial portfolio and an increase of 10.6% in our retail portfolio and a proportionally combined property-by-property investment, property valuation of $2.3 billion, up 12.1% over the past 12 months.

This meaningful increase in the valuation of stabilized properties is a reflection of FIBRA Macquarie's high-quality portfolio and a robust operating environment, which supported an updated range with valuation assumptions, including forecast rental rates and exit cap rates.

Moreover, with approximately 80% of our industrial footprint in the northern markets, our industrial portfolio is very well placed to capture the growing demand for manufacturing and logistics space, supported by underlying trends of near shoring and e-commerce growth. Our industrial portfolio posted a solid result with fourth quarter NOI in underlying U.S. dollar terms increasing by approximately 3.1% year-over-year.

Cash collections were particularly strong. And as of December 31, 2021, trade receivables net of provisions were only MXN 8.2 million, lower by 43.5% sequentially and down 73.4% from the prior year. We also executed on our record 36 new and renewal leases during the quarter, representing 2.8 million square feet of GLA.

At year-end, industrial occupancy was 96%, up 170 basis points from the prior year and 50 basis points from the third quarter. We also realized record high rental rates, which reached $5.18 per square meter per month. This was achieved through a combination of strong renewals with trailing 12 months retention, a solid 82.8%, along with securing 7 new leases across a diverse range of leases including consumer goods, logistics and auto parts. As we look ahead, we have manageable expirations with less than 15% of our lease GLA set to roll over in 2022.

Taking a look at our top 4 markets, which account for approximately half for GLA, we continue to see favorable conditions with positive absorption, limited space availability and continued demand. In our largest market of Monterrey, we saw a very strong year with annual gross absorption in the industry nearly doubling year-over-year, leading to market occupancy increase of 300 basis points. With an abundant labor supply and solid infrastructure, Monterrey is well positioned to capture continued demand in the northern markets. Similarly, Ciudad Juarez, Reynosa and Tijuana are demonstrating strong conditions as the scarcity of land for development support an optimistic outlook as customers compete [indiscernible] opportunities.

With several industrial sector tailwinds, we are building on our strong track record of disciplined capital allocation and are continuing to pursue growth through strategic industrial development opportunities.

We're making good progress on our development projects in Monterrey and Mexico City metropolitan area and taking advantage of a strong supply and demand fundamentals we are observing. We took the decision to commence construction in the second 225,000 square foot building in Mexico City.

The development of both Mexico City buildings will deliver more than 700,000 square feet of Class A industrial GLA in this strategic market. We expect to deliver both buildings in our Mexico City project during the second half of 2022, with the first 183,000 square foot building in Monterrey due for delivery in the first half of this year. We expect these investments will contribute to NOI growth in 2023 and beyond. Beyond these projects, we will continue to be opportunistic and stick to land parcels and selectively pursue new developments in our core target markets.

Turning to our retail portfolio. We experienced our best quarter since onset of the pandemic with a number of improved metrics, including strong collections, declining rental discounts, improving accounts receivable and reversal of certain doubtful debt provisions.

Foot traffic continued to rebound. And in the fourth quarter, it was up approximately 35% compared to the same quarter last year, demonstrating the essential nature of our grocery-anchored centers. However, still remains at approximately 25% below pre-COVID levels. NOI for retail portfolio in the fourth quarter was MXN 109.9 million, up 21.2% from the prior year, driven by a combination of the declining rent discounts and higher collections, along with a reversal of debt provisions from prior periods.

The fourth quarter represents our strongest quarter of collections since the onset of the pandemic, up 17% sequentially and 19% year-over-year. Similarly, rent discounts were down meaningfully with the fourth quarter representing our lowest quarter of rental discount since the pandemic began. We are pleased to be seeing the highest post-pandemic pickup in new leasing, signing 27 new leases in the lowest level of move-outs. While we are certainly encouraged by these results, we keep a close watch on the potential for the recovery in retail to be impacted by ongoing omicron spread, which is hopefully by now past peak infection phase.

The strength of our balance sheet has continued to be a positive differentiator for FIBRA Macquarie. As of year-end, we had MXN 5.5 billion of liquidity, inclusive of unrestricted cash and drawn capacity on our committed revolving credit facility and no maturities until 2023.

Our net debt-to-EBITDA multiple was 5x, and we continue to maintain a healthy debt service coverage ratio and comfortable headroom with respect to our debt covenants. We will evaluate opportunities to further enhance our balance sheet in 2022 and look forward to providing updates.

Further, we are pleased to see that the fourth quarter independent valuation uplift has driven FIBRA Macquarie's NAV level to a record MXN 41 per certificate and our real estate net LTV reduced to 35%, providing enhanced balance sheet flexibility.

In line with expectations, we authorized a fourth quarter cash distribution of MXN 0.47 -- MXN 0.50 per certificate, which equates to a full year distribution of MXN 1.90 per certificate. I am pleased to provide additional color on our achievements in our ongoing commitment to sustainability.

In October, GRESB, a leading ESG benchmark for real estate investments on a global basis, reaffirm its GRESB 3 Star rating for 2021. This week, we were recognized as being an EDGE champion. EDGE champions are organization that collaborate with the International Finance Corporation to accelerate the adoption of green building practices. In the fourth quarter of 2021, FIBRA Macquarie achieved EDGE certifications on 6 industrial properties comprising 1.7 million square feet of GLA in markets covering Monterrey, Sual Juarez and Hermosillo and Binosa, and in total, representing approximately 5.5% of our industrial portfolio footprint.

With regard to our outlook, we are initiating our full year 2022 guidance. We expect AFFO per certificate to be in the range of MXN 2.50 to MXN 2.55, representing a 6% annual increase at the midpoint. We also anticipate a distribution of MXN 2 per certificate, representing a 5.3% annual increase and an AFFO payout ratio of 79%.

I want to reiterate our confidence as we look ahead. Through proactive asset management of our best-in-class industrial portfolio, we have maintained high-quality assets with strong occupancy and a robust leasing pipeline. We are having increased conversations with potential customers looking to diversify their supply chain and to feel ever-growing e-commerce needs.

With more than 80% of our portfolio in the Northern states of Mexico, we are incredibly well positioned to fill this demand for nearshoring. We anticipate steady organic growth from our existing portfolio, further enhanced by selective developments. We are encouraged by our positive outlook and remain confident in our portfolio, strategy and debt construction dynamics in the market to deliver strong operating results and value for our certificate holders.

As always, I want to commend the entire FIBRA Macquarie team for their unwavering commitment and to everyone listening for their ongoing support. With that, I will ask Darryl to open the phone line for your questions. Darryl?

[Operator]

[Operator Instructions]

Our first question has come from the line of Gordon Lee with BTG.

[Gordon Lee, analyst]

Congratulations on the quarter and a very good year. A couple of quick questions. First, on the industrial portfolio. I was wondering if you could remind us in your dollar leases, what -- how the escalation on an annual basis works? Is it linked to U.S. CPI? Or is it a fixed percentage increase that could vary by contract.

And then the second question for both industrial and in retail, given the level of leasing activity during the quarter, I was wondering if you could tell us a little bit of how leasing spreads in both segments performed.

[Juan Monroy, executive]

Yes, with regards to our industrial portfolio leases, all of them have annual increases, the majority of them linked to U.S. inflation and some of them with a fixed increase that does vary on a lease-by-lease basis.

Similarly, for retail, they are Mexican peso leases linked to Mexican peso inflation. In terms of rental rate trends and rollover and leasing spreads there, we continue to see a very vibrant market, industrial sector, definitely a landlords market that is allowing us to improve lease conditions across the board. And yes, we continue to deliver positive lease spreads on that front. For retail, we -- as noted, we saw an important recovery as well and are able to protect and maintain our rental levels. Obviously, the focus of -- for retail this year will be to stabilize the portfolio prospecting and enhancing occupancy and ultimately NOI levels. Simon, do you want to complement some of that?

[Simon Hanna, executive]

Yes. Thanks. Juan. And yes, in the supplementary information, you'll see we do provide rental rate bridges, which show both quarter-on-quarter and year-on-year bridges for the rental rate movements, respectively, for industrial and retail. And in there, you'll just see the ongoing trend, particularly in industrial, where for a number of years now, there has been a consistent positive spread on renewals for the full year for FY '21. it represented USD 0.04 per square meter per month, and that's fairly consistent with what we've been seeing in sort of a running last 12-month renewal spread for a number of years now.

[Gordon Lee, analyst]

Just one quick follow-up, if I could, just on the sort of automatic escalations to the rents as per the contracts. I mean if you look at your year-on-year numbers for the quarter, it's somewhat below U.S. inflation on a year-on-year basis. Is there a seasonality in terms of the -- when these increases happen in your portfolio? In other words, are some of these sort of anniversaries concentrated in the second or third quarter, and that's when we'll see a pickup in rental rates -- realized rents that's more similar to U.S. CPI or what explains that lag?

[Juan Monroy, executive]

Yes. I think that what explains that lag is the things that you mentioned, we did see a number of anniversaries in the first half of the year when inflation was not at the 7% levels, more closer to the 3% level. So that explains a good chunk of that. So we'll expect to see the higher inflation levels come through in some of the new expirations that have been occurring will occur in the coming months as well. That combined also with the fact that we do have leases that have a fixed rent increase. So that's -- those are the 2 facts essentially explaining the lag, Gordon.

[Simon Hanna, executive]

And for volumes going down, it's not through the expirations, but the annual anniversary roll date, yes.

[Operator]

Our next questions come from the line of Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Congrats on the results. On capital deployment, Juan, you spoke a little bit about that during your presentation. But if we look at for this year, and given the strength on the balance sheet that you had, given the depreciation on an asset, et cetera. What can we see this year? Are you planning on potentially looking to buy more land as you're going to be using a lot of the land that you have now this year or buybacks.

[Juan Monroy, executive]

Yes, very -- as always, we take capital management very seriously and have over the 12 past months being very disciplined but also opportunistic at the same time. And we did buy some great land parcels in the Mexico City, Monterrey project that we are currently developing, essentially irreplaceable locations or real estate. So we're pleased with that and intend to develop those projects. In fact, we are accelerating our development timetable in our Mexico City project, and we have commenced a second building there and are currently evaluating potentially accelerating also the timetable for our Monterrey project given the fairly active leasing pipeline that we are observing.

On the potential additional acquisitions, I'll say that we have a very robust pipeline of land acquisition opportunities again focusing our core markets of Ciudad Juarez, Monterrey, Guadalajara, Mexico City and Tijuana. So the pipeline is as robust as ever, and we do intend to close in certain land acquisitions this year so we can gradually get to our objective in the midterm to develop about 1 million to 1.5 million square feet of industrial Class A product in our core markets.

[Adrian Huerta, analyst]

Excellent. Thank you.

[Juan Monroy, executive]

Yes, sorry, I didn't answer the other part of your question on buyback, sorry about that. And yes, obviously, a pretty attractive economic proposition as we're trading in the MXN 25 levels. With our NAV per certificate now given the revised valuation by the third-party valuation company at MXN 41, a tremendous economic opportunity, a very attractive investment opportunity. So as you know, we do have an improved buyback program, and it's a bit of a balancing act, right, and we will -- well, we are very mindful of that investment opportunity. We also want to balance it with investing in real estate so we can create long-term value through investments in accretive industrial development project. So we'll continue to monitor it. And now that we have a bit more balance sheet capacity we'll be open-minded. But for now, we are given priority to funding our development pipeline.

[Adrian Huerta, analyst]

And if I may add just another quick question. Liability management, where can -- are you planning to do something this year? You have some debt maturing in 2023 and also another chunk in '24. Should we expect some liability management this year?

[Juan Monroy, executive]

Yes. We have 2023, 2024 expirations, and we are -- and we have been actively looking at what are the best alternatives. So I do think it's likely that 2022 could be a year where we refinanced some of that debt taking advantage of the current attractive market conditions. So yes.

[Operator]

Our next questions come from the line of Nikolaj Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

I have a question related to the sort of sector region matrix. Can you provide a little bit of color on what's going on maybe the outlook. When I look at the Northwest, it's kind of flattish; Northeast, it's kind of downish; central market is up a little bit. And it surprised me a bit because it goes sort of against a little bit the narrative in your prepared remarks, Juan. So is this kind of a one-off?

Am I looking at this in the right way? I'm going into the notes and looking at year-on-year trends in the rental income in the key markets. And given where Reynosa, Tijuana are kind of at, I would have expected a little bit more growth in these particular regions.

And I was also surprised by the strength in the central market. And if you can add some color on the outer space. This is an important sector in terms of the tenant mix and it's obviously going through a lot of changes with EV and supply chain issues and inventory rebuild and so on and so forth. So what are you seeing there? And what should we expect going forward?

[Juan Monroy, executive]

Thanks for your question, a very complete one. I think that Northern markets are pretty strong across the board. Tijuana market is as strong as we've ever seen, is really on fire there. Really, other markets around that area is starting to see similar trends like Tijuana, like Mexicali, for example, Juárez, also pretty strong. So in general, the northern markets, Nikolaj, are very in high demand, not a lot of supply.

And tenants actively looking for additional space, there's very limited space that is available. So we are observing definitely a landlord's market, maybe markets where rents are being pulled down a bit could be Saltillo where we had some difficult to lease space as it is expected with the remaining 4%, 5% of our portfolio tend to be difficult to lease space.

So we lease some space in Sao Pio, which carries lower rents and portfolio average, maybe that's what you are referring to. In terms of the central market, Mexico City is fairly strong. We are observing very strong trends, primarily driven by e-commerce, it's slightly different to the manufacturing for export segment, but similarly very strong with demand from typical Amazon [indiscernible] and other companies in the e-commerce space and also the more traditional retailers that are expanding their supply chains in a meaningful way. So that's what's driving primarily Mexico City in that central region that you referred to.

In terms of the auto space, really was more relevant for Mexico is what it means for auto parts, and we are fairly bullish on the prospects there. We closed the year -- 2021 year at a strong $94 billion and prospects for 2022 are a healthy increase to $98 billion with prospects in 2023 for even more aggressive growth rate. That on the back of, as you said, inventory built up as currently the inventory levels in the U.S. market at historical lows. So as those inventory levels are increased, we'll see an increased demand for auto parts.

Supply chain considerations on a global basis, they do remain an issue for sure. It has taken longer than we had anticipated. 2022 will continue to be challenged by close supply chain considerations. We expect that to start getting to more normalized levels maybe in the second half, maybe in the fourth quarter. However, we haven't seen a meaningful impact in our tenant operations.

But yes, a bit of a bit of disruptions here and there that they need to proactively manage their supply chain, but not a meaningful impact in our current tenant base. In terms of the evolution of the EV sector, we are observing a Mexico that is contributing to the evolution of the sector, and we're seeing a number of OEMs adapter manufacturing facilities to provide for both EVs and hybrid vehicles. And yes, we hope that trend will continue for the long term. So we remain fairly optimistic about the long lags and prospects of the oil and auto parts sector in Mexico.

[Nikolaj Lippmann, analyst]

Okay. Can I just ask a follow-up, and thanks for the long answer, the good answer. When I check specifically, let's take the Northwest, which I would imagine would include Tijuana. So your 3 months rental revenue is this MXN 192 million. I divide that by the last 3 months of the past year, MXN 190.2 million. I get a less than 1% increase, which one would think is just a low increase in such a strong market such as Tijuana. And when I do the same thing for Northeast, I get a negative number. And on a relative basis, these 2 northern markets appear. I'm not looking at recoveries, they just appear to be the 2 underperforming markets within your portfolio, which I thought was peculiar. Am I looking at this in the right way?

[Juan Monroy, executive]

Yes. I'm not sure that Northwest, Northeast commentary that you're looking at. And I'll have to -- you throw at me some numbers that I'm not sure what you're looking at there. But yes, in terms of the fundamentals, as I mentioned, very strong in both the TJ and Juárez markets or the Northwest and the Northeast markets in general. And if there are any sort of abnormal movements might be in connection with the portfolio mix around anniversaries and maybe the one-off lease that was on below market. But yes, maybe we can expand a bit further later today, as there is nothing that comes to mind that will explain that.

[Simon Hanna, executive]

Yes. I think the -- yes, the key is that it is a mix between sort of the move-ins and the move-outs, which I guess, can distort some of those overall trends. And so I think the best way to look at it is where we show the consolidated renewal spread on a portfolio-wide basis, I think, rolling in the last 12 months. That's where we are seeing a consistent pickup on renewal rates and that sort of does translate to the stronger market performing well.

[Operator]

Our next question is coming from the line of Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

I would like to go back to the structure of the contract that we mentioned for that fixed increase per year. Can you tell us what percentage of your contracts have that annual increase in place and what's the level of increase that they have. And also, we are planning to negotiate different rates or different structure, given the current inflationary environment. And the other question that I had is regarding your development plans. So you mentioned that you want to focus on development, what kind of buildings or sectors you want to focus on and also the regions.

[Juan Monroy, executive]

Yes, starting with your second question, very excited to see our development program really ticking off. Our focus is really to build the best product out there in Mexico. We're really building world-class facilities, Vanessa. As a reminder, most recent building of Juárez achieved, for example, lead coal merchant force certification, which is the highest in Mexico, maybe even in the LatAm region, I believe. So we are building world-class facilities, very conscious about environmental considerations, so to be environmentally certified, and we're very focused in the core markets of Mexico City, Monterrey, Juárez, Guadalajara and Tijuana.

As a reminder, our midterm prospects is to develop about 1 million to 1.5 million square feet of GLA on an annual basis and the expected yield is somewhere between 9% and 11%. Obviously, it depends on what market we're talking about the yield might vary within that range. So very excited that we're getting to those levels this year with approximately 800,000 square feet of GLA under construction in a very active pipeline of land acquisition opportunities. In terms of the first question and fixed increases, I'll say that we have, again, the majority of our leases being CPI-linked with a number of them that do have fixed increases that range in the low single-digit levels. And was there anything else there, Simon, is there something I missed?

[Simon Hanna, executive]

You've got sort of between the fixed step-ups and then there's also somewhat a cap where it's between the CPI or that fixed rate.

[Juan Monroy, executive]

Okay. That's it. Thanks, Simon. Thanks, Vanessa.

[Operator]

Our next questions come from the line of Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I have one question on the revaluation of the properties that you just showed. Do you have any sense of the numbers by region? I assume that perhaps in Tijuana, you have maybe 15% or even 20% increase. But can you please give us that level of detail?

[Juan Monroy, executive]

Pablo, thanks for that. Yes, I will say the adjustments from CBRE were really across the board, in general. We had perhaps a more focus or more of an increase in markets like Tijuana, Mexico City, Juárez, like the core markets that I mentioned. Those markets were the ones where we observed a tightening of -- a more aggressive tightening of cap rates and rental rate projections.

But in general, was across the board with maybe a little bit more strength on those core markets, which is a reflection of what's happening really in those markets and in the market valuations that we have observed. And in retail, it was really just working through of some of rent discounts and rent collections assumptions that CBRE had done at the beginning of the year as we work through some of those and we increased collections, that's what made the biggest difference and that's what drove the retail portfolio valuation increased to be about 10% compared to last year.

And important to remember that we did experience a 20% drop in the retail portfolio valuation from '19 to '20. So we're still about 10% below that pre-COVID level for the retail portfolio. So that's sort of the more specific dynamics of the changes of revaluation, Pablo..

[Pablo Monsivais, analyst]

Okay. Perfect. And if I can have a follow-up question on Gordon's. Do you have any number that we can have in mind in terms of the lease spreads that we should expect for, I don't know, 2022, maybe even 2023, just like that range that can help us to model your statement.

[Juan Monroy, executive]

No, I guess not. We don't provide that sort of rent-specific guidance, Pablo. We believe that given the strength of the market, we'll be able to deliver a fairly positive spread on rollovers and the lease portfolio will continue to grow given a combination of U.S. CPI and fixed rate increases. So yes, we're not necessarily guiding on what we expect on leasing spreads for 2022. But I think the basis are definitely positive for us to achieve a positive lease spread.

[Operator]

Our next questions come from the line of [ Juan Tansa ] with Bradesco.

[Unknown Analyst]

My question has to do with the electricity bill. If you can comment on the impact that it's having on your core markets, please?

[Juan Monroy, executive]

The impact that it's having, what, sorry?

[Simon Hanna, executive]

On our core market.

[Juan Monroy, executive]

On our core markets, yes. I'm not entirely sure what you're referring to. I'll just address that in 2 different ways. First, with regards to the energy availability, it is an issue for -- to consider for new developments. It is taking a lot longer, Juan, to secure energy on new projects. There is uncertainty and lengthy processes that are delaying energy availability in connection with some potential acquisitions, something that we're taking a very close eye as part of our due diligence.

Also, in terms of the energy reform, obviously, it is something that we are following closely. We believe that our existing tenant base won't be necessarily -- or they're not necessarily too focused on that and that the impact we hope will be marginal. Obviously, we are concerned by what that could mean at a country level from an attractiveness perspective for Mexico, although we believe that the fundamentals are pretty strong that customers are not as concerned as one would have thought with regards to that energy bill consideration.

Yes. Other than that, nothing to report, Juan. Maybe just to complement and saying that we have an active -- and plan to be more aggressive with our solar program, install rooftop solar in some of our retail properties that we've done in the past and are looking to do that as well for some of our industrial buildings as well.

[Operator]

Our next questions come from the line of Juan Macedo with GBM.

[Juan Pablo Macedo Carrillo, analyst]

I was wondering on development, could you give us some color on the deceleration and pushback on dates of some of the development projects?

[Juan Monroy, executive]

Yes. No, sure. We have 2 active development projects at the moment, Juan. One is in the Apodaca market in the Monterrey metro area, a very strong market there. We have a 180,000 square building under construction, which is progressing nicely and expected to be delivered in the first half of this year. And we have a pretty healthy pipeline to potentially lease that building before our pro forma assumptions.

So as a result of that, we are considering potentially commencing construction of a second building earlier. Currently our estimates or business plan calls for the second building to commence construction towards the end of the year. And we might accelerate that commencement date. So that's something that is currently under evaluation. With regards to our Mexico City project, -- we have 2 buildings there. We had commenced construction in a 500,000 square foot building. And given market conditions, we are commencing -- we have commenced work on the second building, expecting to deliver now both buildings in the second half of the year.

So the second building ahead of what was expected. And the first building was delayed as it was expected to be delivered in the first half of this year and delay was in connection with the transition at the municipality level from the authorities that change -- the authorities change at the end of the year, and we expected a bit of a delay in connection with that transition. But now happy to report that we have state and municipal level support and are accelerating the construction of both buildings.

[Operator]

Our next questions come from the line of André Mazini with Citigroup.

[André Mazini, analyst]

My question is on the retail segment. If we look at pre-COVID, of course, it was a greater share of the NOI, call it 32%. Nowadays, it's 11%. At the same time, Valle Dorado, right, is going to remodel. So I wanted to understand, I mean, the loss of share, which is due to maybe COVID itself and the tenants not recovering as they were paying rents in COVID. And also what's -- even Valle Dorado, which is the one remodeling, if that's impairing the NOI generating capacity of that asset?

And what do you guys think going forward, but which shares should we think the retail should stabilize back to the 17%, something before the 17% and 11% that we're seeing right now. Any color on that would be great.

[Juan Monroy, executive]

Thank you, André. Yes, very excited to see that retail is turning the corner, great foot traffic during the holiday season. The share of our total portfolio is about 10%, 11%. I don't think it'll move much. Some of the changes from pre-COVID as noted are regarding occupancy and ultimately, NOI levels. in connection with occupancy and rent fee discounts.

Valle Dorado is on the remodeling, but continue to operate, we do have a [indiscernible] property in the Mexico City metropolitan area. Fantastic location that we had in our retail portfolio that most likely will be converted into a logistics facility. So that will further, I guess, reduce the share of retail portfolio.

So going forward, what I expect for that percentage to remain around that 10% level as the 2 trends that we will observe will be, on the one hand, a recovery of the retail portfolio, which will -- could potentially increase the share. But also on the other hand, we are accelerating our development program of the industrial portfolio and also as [indiscernible] comes online that will further add NOI to the industrial portfolio. So over the short to medium term, I do expect for that percentage to remain somewhat constant at around that 10%, 11% level, André.

[Operator]

Our next questions come from the line of Alberto Valerio with UBS.

[Alberto Valerio, analyst]

Congrats for the 2021 results. My question is looking forward to 2022. The first one, about the guidance. You give the guidance a little bit conservative. I would like to know if however it's our correct? Because like you said, there is some residual inflation from 2021 to be passed through 2022. Also, the retail that you just mentioned is 10% below the pre-COVID level that there is some space to recording of some projects should be delivered in this year. So -- and correction if the FFO for the year between 5% and 10%, it's not conservative.

And my second one, due to the revaluation of the assets we estimate here below 8% cap rate, and you guys said that the new projects that's been developed has a cap rate between 11% and 9%. My question is, are you guys thinking in doing some asset recycle in the future.

[Juan Monroy, executive]

Yes, with regards to the 2022 guidance, what we tried to do is to be as realistic as we possibly can. Forecasting in this day and age is becoming increasingly difficult with uncertain -- with so many uncertainties around us, namely COVID and other macro factors. So from our perspective, our AFFO guidance is realistic. We do have an FX assumption at 20.50 which is below analyst consensus of macro analyst. So maybe a little bit there, but we've seen so much volatility in the FX that is hard to predict.

So that's one key factor to consider that FX assumption that you can take your own view and you might consider our assumption to be conservative. But yes, given the uncertainty levels, that's what we felt prudent to use. With regards to retail. Yes, we do expect a gradual recovery through the year, and that has been reflected already in the numbers. Hopefully, it will be an accelerated pickup. But given the leasing pipeline and in our current projects we have, we do a bottom-up property-by-property, lease-by-lease forecast, then we reflect that what we believe can occur during 2022. In terms of the development projects, those will be delivered, as I said, in the first and second half of the year, the ones that are being delivered in the first half are closer to the end of Q2. And we do assume a lease-up period. Therefore, the positive impact of the development projects really will be more meaningful in 2023. So that sort of explains or addresses your concerns there. And I think it's realistic guidance.

The second question was on...

[Simon Hanna, executive]

Asset recycling.

[Juan Monroy, executive]

Oh, yes, recycling, sorry. Yes. No, listen, as you know, we've completed a pretty comprehensive property-by-property review and develop a natural recycling program that we executed successfully. So we have cleaned up the portfolio. And our focus is not necessarily to develop and then to sell, which obviously would make a nice profit. But we prefer to think ourselves less merchant developers and more as a long-term developers and what we are developing we intend to maintain in our portfolio for the very long term. So yes, nothing necessarily earmarked although we will be opportunistic with some potential sales, not a programmatic set of transactions there that has been completed already.

[Operator]

Thank you. There are no further questions at this time. I'd like to turn the conference back over to management for any closing remarks.

[Juan Monroy, executive]

Yes. Thank you very much, Darryl. Appreciate it, 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 2022 results. Thank you very much. Have a great day.

[Operator]

Thank you. The conference is now concluded. Thank you for joining our presentation. You may now disconnect.