Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the FIBRA Prologis earnings conference call. [Operator Instructions] Please be advised, today's conference is being recorded. [Operator Instructions]

It's now my pleasure to hand today's conference over to our first speaker today, Mr. Kosta Karmaniolas, Head of Investor Relations. Please go ahead, sir.

[Kosta Karmaniolas, executive]

Thank you, Holly, and good morning, everyone. Thank you for joining us for our First Quarter 2020 Earnings Conference Call. Today, we will hear from Luis Gutiérrez, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our Senior Vice President of Finance, who will review results and guidance. Also joining us today is Hector Ibarzábal, our Managing Director.

Before we begin our prepared remarks, I would like to remind everyone that all the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are current as of the date of this call. We take no obligations to publicly update or revise any forward-looking statements after the completion of this call, whether as a result of new information, future events or otherwise, except as required by law.

Additionally, during this call, we may refer to certain nonaccounting financial measures. As is our practice, we had prepared supplementary materials that we may reference during the call as well. If you have not already done so, I would encourage you to visit our website at fibraprologis.com and download this material.

With that, it is my pleasure to hand off the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Kosta, and good morning, everyone. Before I begin, I want to say that our team here in Mexico are all healthy and working remotely. The people side of our business remains a priority. Even as we remain steadfast in our focus of creating value for certificate holders, our focus is trained on doing everything we can do to help our employees, customers and communities through this difficult time. I hope you and your loved ones are staying healthy and safe.

We started 2020 on a strong note, delivering operating and financial results above our expectations despite the beginning of the COVID-19 pandemic. Additionally, we completed our shareholder rights offering, which was oversubscribed. I'm very appreciative of the support we received with more than 90% of our certificate holders participating. We're able to issue 200 million certificates in the program, raising MXN 8.3 billion. Shortly after quarter-end, we used the proceeds to acquire Prologis Park Grande in Mexico City, which is a strategic master plan, parked on 4 million square feet that is 100% leased. While noted in our first quarter results, this acquisition will further our concentration in consumption, Mexico City and, most importantly, e-commerce.

Let me highlight the operational results for the quarter. Year-to-date, we have addressed 56% of leases expiring this year. Occupancy remained elevated with 4 of our 6 markets above 96%. Importantly, this was the 26th straight quarter with portfolio occupancy above 95%. Re-leasing spreads were positive for all 6 markets.

Before discussing the impact from the health pandemic, I want to briefly touch on why I think FIBRA Prologis will differentiate itself from the competition during this uncertain times. We have chosen to focus on the 6 most dynamic markets, which we believe will foster superior long-term growth. Having high-quality properties that standardize these contracts and best-in-class customer service constitutes a foundation of our business. Our customer roster covers diverse set of industries and the vast majority are multinational companies. We have a huge head start on e-commerce and believe our portfolio in the border markets will be a beneficiary of near-shoring activity.

Regarding the impact on our business from COVID-19. In the first quarter, we collected 97% of rents due, in line with expectations. This is a metric we follow closely. It is also noteworthy that rents are throughout the month. Not all rents are due on the first day. Through the first 22 days of April, we have collected 74% of rents compared with 80% for the same time in April of '19. April is a unique -- that we have holy week and Easter holiday, which typically is low rent collection. It was also the first month since the government-mandated social distancing and ordered nonessential business to shut down. It's too early to draw conclusions, but we felt it was important to provide real-time information. Based on good conversations our team is having with our customers, we feel good about the pace of rent collection. As of April 22, approximately 80% of our customers were operational. In the first quarter, we had rent relief requests of 3.3% of projected annual revenue subsequent to the quarter, and we have received requests totaling 7%.

We're partnering with our sponsor Prologis across the global customer network to address these issues. We will review each request carefully and what evidence of financial distress exist, we will work with our customer for a mutually beneficial solution. To that end, we have received many requests from institutions that are in great financial condition and are looking to preserve liquidity if the opportunity is available. We will politely turn down those requests as we will not subsidize better capitalized companies with FIBRA Prologis capital.

As a result, we think we will ultimately provide assistance to customers representing less than 1.5% of our projected annual revenue, which are structured to be repaid this year. While we do not have any clarity into when the global pandemic will end, nor we do not know the severity, I feel much better -- much more confident going into this downturn than the last cycle.

Turning to the broader real estate environment. Demand was relatively healthy in the first quarter, and development activity is reacting in real-time to the economic uncertainty brought on by the pandemic. Market vacancy declined from year-end. Near net absorption in the first quarter modestly exceeded completions. Supply risk overall remains low with 40% of the product under construction in Mexico is built to suit. Given the construction activity overall, except those related to infrastructure improvements, have stopped by order of the federal government, we expect meaningful delay in the amount of new supply delivered this year.

Now let me spend a few moments on what we're seeing on the ground. E-commerce, which we have viewed as an important structural driver for logistics real estate is accelerating. The health pandemic is forcing many Mexico to change their buying habits and pushing them to adopt online shopping faster than they originally projected. As we have previously said, we think Mexico City will benefit most from the strength, followed by Guadalajara and Monterrey.

On the other side, manufacturing continues to be an important segment of the Mexican economy, even as certain nonessential business have shut down. Where we have little exposure to the auto sector, we have not seen -- we have not been immune to some manufacturing customers having to shut down. Other customers have been able to keep operating by producing equipment that is deemed essential. An example of this resourcefulness is an important customer of ours in Reynosa, which usually makes office furniture, began producing furniture and medical technology equipment for the health care industry at the start of the pandemic in order to stay operational. In our border markets, we're still engaging customers on expansions as we have over the past several quarters, particularly in Tijuana and Juárez, where the outlook remains healthy.

Despite the near-term uncertainty, we remain optimistic about the long-term structural drivers of logistic real estate, particularly the near-shoring of manufacturing operations and the growth of e-commerce. With the acceleration of e-commerce adoption, the supply chain will emphasize resiliency over efficiency. This will lead to an increase in inventory levels. We have worked hard to build a company that is resilient during uncertain times with a focused investment strategy and prudent balance sheet philosophy, let me highlight why we are better positioned heading into this period of economic uncertainty.

Logistic real estate is the backbone of the supply chain. We're seeing firsthand that close proximity to the consumer matters. A well planned supply chain is critical in today's economy. Unlike other asset classes that depend on discretionary spending to fuel demand, logistics is a consistent performer. Our portfolio vacancy is only a little more than 3%. Over the past 2 years, we have been pushing term. And as a result, we have approximately 15% of the portfolio expiring in each of the next 3 years. This is a very manageable expiration schedule. We only have $6 million of land and no meaningful construction in progress on our balance sheet.

And finally, we have worked hard to increase flexibility and liquidity while maintaining low leverage. We have no debt maturities until 2022. We view our balance sheet as a major competitive advantage.

In summary, we remain committed to creating value for certificate holders. Our portfolio resilient and built to outperform in any environment.

With that, let me turn the call over to Jorge.

[Jorge Girault, executive]

Thank you, Luis. Good morning. Thank you for joining us, and I hope everybody is in good health. Before turning to operations, let me start with a few remarks. Let me begin by saying that our risk management strategy keeps paying off. We don't have short-term capital requirements. We have had a prudent cash flow management. Our AFFO calculation has always been FFO less noncash items, such as streamline rent and debt amortization and other cash items like leasing commissions, payments and property improvements. We have never capitalized these expenses. As a result, our distributions have been with free cash flow. In short, our balance sheet and portfolio mix gives us staying power through this cycle, which could turn it into investment opportunities eventually. In line with our prudent approach to capital, in these new market conditions, we will be mindful of the use of our line of credit.

Now turning to operations for the quarter. First, let me start with account receivable. This quarter, we had a 30% increase versus the end of 2019 in dollar terms. Our average since IPO has been 1.5% of gross revenues for the year or $3 million. We are assuming our account receivables to increase to around 3% of growth rents given the COVID environment and its effect on some of our clients.

Leasing activity was 2.6 million square feet this quarter. Quarter-end occupancy decreased 70 basis points year-over-year to 96.8% and 80 basis points from the fourth quarter. The decline in occupancy is due to seasonality, in other words, was expected.

Net effective rent change and rollover for the quarter was a positive 6.6%. Cash same-store NOI declined 0.2%, driven mainly by concessions related to lease terms, partly offset by higher average occupancy and rent increases.

Let me turn to our financial performance. FFO for the quarter came in at $32.6 million, which represents 13.5% increase compared to the first quarter last year. This increase is driven by the realized gain on FX of $3.2 million as a result of buying forward contracts in order to convert pesos into dollars following the rights offering. Taking away this gain, FFO would have been $29.4 million, which represents 2% increase year-over-year. AFFO was $23.3 million for the quarter, flat when compared to the same period last year.

Moving to our balance sheet. As we mentioned, FIBRA's balance sheet is reflexible, with no short-term maturities until June 2022 and no capital requirements for development or land acquisitions. Our line of credit is unsecured and committed. We have no need to draw on it for liquidity at this moment. This said, during April, we used a portion of it to the -- for the acquisition of Park Grande. We ended the quarter with a loan-to-value of 19.6% due to the cash on hand at quarter-end from the rights offering.

On other metrics, weighted average debt cost was 4.5%, weighted average maturity of 3.6 years. And excluding the cash on the rights offering, we have $325 million of liquidity through the line of credit. We have positioned the portfolio and balance sheet to be in excellent shape.

Let me provide an update for 2020 guidance. Given our recent and successful rights offering, the acquisition of Park Grande and the COVID-19 environment, we have adjusted our guidance. Our 2020 guidance uses a MXN 25 exchange rate for the remaining of 3 quarters versus our previous guidance of MXN 19.5 per dollar for the whole year. We also excluded the impact of any potential incentive fee.

Given our focus on consulting and tenant mix, we expect our portfolio year-end occupancy to range between 94% and 96%. We forecast cash same-store NOI growth to range between a negative 4% and a negative 1% for the year, mainly due to weaker peso. Annual CapEx as a percent of NOI to range between 13% and 14%. G&A to range between $19 million and $22 million.

We expect to acquire between $350 million and $400 million, which includes the acquisition of Park Grande at the beginning of April as well as a couple of last touch facilities that will come during the year. Putting all these together, we are setting our full year FFO for CBFI range between USD 0.14 and USD 0.16.

Before giving guidance on distribution, let me remind everyone that under FIBRA tax regulations, FIBRA are required to distribute 95% of taxable profit, including FX losses or gains. Given the recent peso devaluation, we believe that at current levels, this could result in a taxable loss for the year. That being said, FIBRA Prologis is committed to distribute cash flow generated, regardless of the fiscal loss it could end up with, as we have done in the past.

Now returning to our guidance, we are adjusting our distribution to USD 0.097 per certificate, which represents approximately a 6% dividend yield at current value.

To wrap up, we had a great start of the year. We are analyzing April data, which is the first full month since the pandemic impacted our business. We still need to see what this environment will bring. However, given that the whole economy sector is an important part of our portfolio and the fact that our balance sheet is flexible with significant liquidity and no major capital commitment we feel strong about our business.

With that, I turn it over to Holly for Q&A. Thank you.

[Operator]

[Operator Instructions] Our first question is going to come from the line of Sheila McGrath, Evercore.

[Sheila McGrath, analyst]

I was wondering if you could be more specific on the same-store guidance of minus 4% to minus 1%. What's driving those changes? And just your thoughts on the supply chain potentially benefiting Mexico? Are there any efforts from the Mexican government to help the country seize this enhanced opportunity?

[Jorge Girault, executive]

Thank you, Sheila. This is Jorge. Regarding the first part of your question on same-store NOI growth, I mean, you have to understand that this environment with the COVID is nonterritory. I mean you don't know how long it will take and how our clients will be impacted. It's not the same that we come back on June 1 and July 1, et cetera. But that has a big impact in our signs. That said, as I mentioned in my remarks, we moved our FX trend from MXN 19.5 to MXN 25, that's a 28% increase just on the FX. And also, I commented on the AR as we assume an increase from 1.5% to 3% of growth rents in our AR. So all that combination brings you to the guidance that we're giving on the same-store. Also, as a reminder, the concessions that we have given our clients for the last, I would say, 3 to 4 quarters, where they have extended their rents. And by that, we have given a little more of free rents, just as a matter of longer lease terms. That also has impacted the NOI growth. So that's evident in the first quarter. And that's also impacting our guidance for the year.

[Luis Gutierrez, executive]

So I guess, the second part of your second question, Sheila -- this is Luis. So this near-shoring will be a structural driver going forward. And I guess, logistic real estate will benefit. I think this trend will be exacerbated. It has -- had already been happening. Before we saw this trend, we saw the U.S.-China trade war beginning to exacerbate. This pandemic is just accelerating. So supply chains will be redesigned to be closer to the customer, and they will favor reliability versus efficiency so in that sense, Mexico will be a winner. We're already seeing this in our border markets. Even as the pandemic started, we have been seeing some clients and especially in Juárez and Tijuana, making some questions about new space. In addition, logistic real estate will -- when because inventory levels will rise as a result of this reliability versus efficiency.

As to the Mexican government, I think there is conversations currently to see how the definition of essential and nonessential is somehow in check with the U.S. I believe there is current conversations, and I remain optimistic that there will be an accord between the Mexico and the U.S. on this matter. Certainly, the health of workers is the main priority. And I am sure many of the companies will take care of that with the proper measures so that there are no more spreads or outbreaks in those factors.

[Operator]

And our next question is going to come from the line of Eduardo Alvizouri, GBM.

[Eduardo Alvarez, analyst]

I have 2 questions. The first one is regarding the sources you may pull from the credit line. Like how much could we expect for either the acquisition of the remaining properties or for liquidity purposes? And the next question is, if we could get more color on the negotiations you are reaching with tenants. Like how many months of deferrals are you granting? Or what type of agreements are you reaching?

[Jorge Girault, executive]

Eduardo, this is Jorge. Your first question, it was a little bit hard to hear, but you were asking about the credit line and its use going forward for the Last Touch acquisition that we have in the pipeline. That's about around $10 million to $20 million. We're still in negotiations. We're looking at those Last Touch facilities similar to the one that we announced at the beginning of the year in Santa Maria. So that's -- for those properties, it's that amount. That, as I said at the beginning of my remarks, we are being mindful of the use of the line of credit. And also, there could be some opportunities. So those, we don't know, but I mean that's what we have in the pipeline.

[Luis Gutierrez, executive]

Yes. So just let me clarify. So acquisitions going forward, we will need to see how the market behaves. And today, the investment market is muted. So we need to see what is the price discovery. So at this point, all new acquisitions will be halted until we have further clarity on where the market is moving. So with that, let me turn the call over to Hector for the second part of the question.

[Hector Ibarzabal, executive]

Thank you, Luis. Good morning, everyone. Eduardo, thank you very much for your question. Since this COVID situation started, we have received several requests from analysts and investors. Understanding what's going to be FIBRA probably is positioned towards the pandemic environment that we are leading. As we have commented in the past, we are a customer centricity-focused company, and customers are the best things that we have in FIBRA Prologis. We communicated with all of our customers since day 1, showing our support and establishing an open communication. We took care of selling the right processes for these pandemic conditions. The rent revenues are the only revenues that we have, and we always work very hard trying to preserve. 85% of our customers are multinational companies and hold a pretty strong balance sheet. We will not use FIBRA Prologis' balance to help order strong balances. We consider those requests to be opportunistic, and we will not entertain it. We will focus though on supporting the remaining 15% of our customers that really require cash flow assistance. Our support will consist on rent deferrals and never on free rent. For most of the cases, we think that we will be able to design a win-win situation. So we will end up receiving somehow additional businesses on exchange of the support provider. According to the specific release that we will provide to reach customers who are doing a specific analysis, understanding the financial strength and the visibility of the business and supports are moving from 1 to 3 months of rent deferral. The overall deferral that we will be providing, we consider to be on the range of USD 1.5 million to USD 2.5 million of our total revenues.

[Operator]

Our next question is going to come from the line of Gordon Lee, BTG.

[Gordon Lee, analyst]

Hope everybody is doing well. Two quick questions. First, on the M&A guidance, where you mentioned $350 million to $400 million in 2020. I noticed that the original acquisition target that you intended to do alongside Park Grande was for 10 properties, including One in Monterrey and another in Juárez, I believe, that ended up not happening. So I was wondering what happened to those 2 properties? And it would seem by your comments that you're not expecting to acquire them in 2020. Is that something we might see in 2021? And the second question on your distribution guidance. I noticed that if you look at the implied payout ratio as a share of FFO, that declined from the previous slightly over 70% to around 64%, 65% for the new guidance. Is that just yourself providing additional cushion to see how things play out on the collections front?

[Jorge Girault, executive]

Thank you, Gordon, for your question, and yes, you're right. So we decided to only buy Grande. The original package included those sort of 2 properties that you mentioned in Juárez and Monterrey. So at this point, all acquisitions are halted, as I mentioned. And those properties are remaining in deploys balance sheet. And certainly, the FIBRA has the first right to acquire them. I don't believe Prologis will sell them anywhere because it's in the main interest of Prologis to eventually sell them to FIBRA. So I guess, once the year advances, we know the extent of this pandemic, how it's evolving and how we're seeing tri-discovery, we will make the best capital allocation decisions. And in this case, we will analyze acquiring from Prologis' parent. We will have opportunities from third parties, and others that may come. So we are open to have the best capital allocation in the interest of our shareholders.

[Luis Gutierrez, executive]

Gordon, regarding your second question on the distribution, I mean the reason why we are decreasing about 22% vis-à-vis in dollar terms, our distribution versus the previous guidance has to be -- to do with what I mentioned in my previous remarks, we're increasing our FX by 28% from 19.5% to 25% (sic) [ MXN 19.5 to MXN 25 ] -- to MXN 25, sorry, per dollar. We are assuming higher accounts receivables, reaching 3% vis-à-vis 1.5% that we have had since IPO. So those things are all embedded into the way that we are assessing our dividend. And by the way, we are decreasing in dollar terms, 22% of dividend, but in peso terms, if you take the MXN 19.5 and MXN 25 and apply it to the previous dividend per certificate, then we are flat. We're basically flat. And if you look at other companies, according to the economists worldwide, I mean companies are closing their dividend 66%, given the pandemic. We are 1/3 of that at this moment in dollar terms. So those are the reasons why we are guiding to this new dividend.

[Jorge Girault, executive]

So Gordon, just last comment. So we have this very tough environment. Nobody knows how deep it will get. So we have made some assumptions, which we believe are the best we can by talking to our customers and trying to assess the situation. So we believe this new guidance provides a good cushion, and we will evolve every quarter and review our assumptions, and we'll update you every 3 months.

[Operator]

Our next question is going to come from the line of Nikolaj Lippmann, Morgan Stanley.

[Nikolaj Lippmann, analyst]

Just 2 very quick questions, if I may. First, on live data. You provided some live data on payments, and you also mentioned that e-commerce is accelerating. Would you -- can you provide any kind of almost live data on that just to get a sense of the magnitude? I think a lot of people are interested in that, number one. Number two, kind of a follow-up on previous question. When you think about supply chain reorganization in Mexico in the long run, what are some of the sectors that you think are mainly affected by that? What are the regions where you see the main opportunities there?

[Hector Ibarzabal, executive]

Thank you, Nikolaj, for your question. This is Hector. As you mentioned, we're expecting to see a very important enhancement of the e-commerce business. In the past, we used to see that 23% of our operations were coming from e-commerce. And the way we have seen these last 4, 5 weeks, we have seen that this number has probably multiplied by 2. In Mexico, only 4% of the retail sales were directed to e-commerce that had experienced in the last 5 years are very important growth. With this stay-at-home economy, a lot of people that, for some reason, have not visited the e-commerce or the online buying, they will do it, and they will understand all the benefits that this provides. We need to understand that this is a situation that nobody knows how much is going to last, but it will last enough to make these new shoppers online, really realize the benefits that shopping online represent. The 2 most important e-commerce players in Mexico, which are customer of FIBRA Prologis, we talk with them very frequently. And we have seen how their operations have increased importantly. It is amazing the amount that food and beverage has increased and there are some other factors of some other issues like clothing and sports goods that probably has reduced. But on the overall, the balance is very positive. On these days, we are focusing on the operations of FIBRA Prologis. So we have had the needs, and this is good news on the Prologis and the sponsor side to be entertaining requests from big commerce -- from big e-commerce operators that as we speak, they have important expansion plans, and they are not able to find those requirements on the existing buildings. So there's several built-to-suit opportunities that are going on in the medium of this pandemic situation, which reflects on a very objective manner how e-commerce is going to be boosting. FIBRA Prologis is very well positioned to take care of these opportunities. A lot of these customers are already our customers and are part of our global cost of goods. And we are happy with being able to provide a diverse type of solutions to the requirements that they are facing.

On the supply chain situation, and I think I will divide this in 2 phases. Phase #1 is the pandemic situation, what's happening in China. And in America, we were just listening about it. We started receiving several visits from multinational companies that on the past, they were focusing to be only cost-efficient on receiving the components of their supply chain. Today, I can appear that the situation of being cost oriented is definitely moving very rapidly to be certainly oriented. It's useless to have a component very efficient in cost. If you're going to have uncertainty of receiving that component, missing one component would represent the lack of supply of your complete production. So I do see this phenomenon very active before it started hitting here in the Americas. And the second phase is one that we're in the pandemic situation. This situation has not decreased, but on the contract, we see opportunities, large build-to-suit transactions that were not part of our previous pipeline that now are happening as we speak. It's too early to say how this is going to end, but I think that both trends, the one referred to the increase of e-commerce activities in Mexico and the near-shoring where Mexico is going to be highly benefited are 2 important circumstances that are going to be benefiting the industrial sector as FIBRA Prologis is very well positioned to take advantage of this opportunity.

[Luis Gutierrez, executive]

So just -- let me add the sectors. I think this is going to be broad based. Auto was the main sector in the prior cycle. But on this time, we see it more broad-based, electronics, pharma, consumer products, even e-commerce of course, auto will remain, but this will be a much broader base increase.

[Operator]

Our next question is going to come from the line of Eduardo Altamirano, HSBC.

[Eduardo Altamirano, analyst]

On the asset value front, basically, what valuations have you seen transpiring across the market, if any, right now? Or what are the pondered values that are being discussed? As well as the other question that I had is that you mentioned within the release that you're getting inquiries about short-term rents. Is this something that you're seriously considering that what the effectiveness is in the total -- in terms of the total portfolio? And how much additional value could this add going forward?

[Luis Gutierrez, executive]

Okay. So thank you, Eduardo, for your question. So let me address the valuation question. I think it is too soon to tell the movement in cap rates and valuations. There's no transactions happening. And until we know how this behaves, I think values will be there. I guess in the medium term, we could see values stabilized because we'll see a lower interest rate environment. But I guess, is something that we need to see how this evolves. On the short term, I think valuations are a little bit uncertain, and there is no clear visibility.

[Hector Ibarzabal, executive]

Regarding -- Eduardo, regarding the question that you made about the short-term lease activity that we see. I need to mention that we have not had any month-to-month increases calculated by this pandemic situation. And we have only 6 cases, which represent 400,000 square feet in hold over. 5 out of these 6 cases, we're just in the process of renewing with new conditions and with new terms. And I would say that it's only 1 of these 6 cases that might not renew with us.

Luis mentioned it in his opening remarks, we have already done the heavy lifting on the renewals for 2020. And I think that we will not experience any difficulty on this side. We have been able to communicate with all of our customers. And I think that we have a pretty good understanding of what the position is. Some of them are completely focused on operations. And this is probably why the normal dynamic of their renewal business could get delayed on limit. But I don't foresee any issue in this regard.

[Operator]

Our next question will come from the line of Francisco Chávez, BBVA.

[Francisco Chávez Martínez, analyst]

I have 2 questions regarding the cash distributions. The first one is, do you plan to continue distributing cash on a quarterly basis? And the second question is, and I'm sorry if you have mentioned this before, but what is the payout ratio increased in the new guidance for cash distribution?

[Jorge Girault, executive]

Francisco, thank you for the call. Yes, I mean, we still are planning to do quarterly distributions. Please remember that the first quarterly distribution was made already. So we will go into the second quarter distribution for that purposes. In terms of the payout ratio, given everything that I said, right now, our assumption is that it's in the mid-80s of AFFO.

[Operator]

Our next question is going to come from the line of [ Luis Jans ], Campos.

[Unknown Analyst]

Just 2 quick questions. One is related to your U.S. dollar exposure. I know you have about 2/3 of your revenues being U.S. dollars. I was wondering if you're having more conversations with your clients regarding shifting from U.S. dollar contracts to Mexican pesos and whether you're willing to entertain that. And two, what's your outlook in terms of property taxes as the government going forward may need to obviously improve the public finances and potentially higher taxes on the property side could be an option.

[Hector Ibarzabal, executive]

Luis, thank you very much for your question. This is Hector. This is the first time that we are facing a pandemic situation. But this is not the first time that we experienced an important devaluation on our operations. You are right. This 25% devaluation that we have experienced, automatically brings some anxiety to some customers. And I need to tell that always that the situation happens, the request or the questions regarding potential peso leases, they start to appear. We have never exchanged, and we will not exchange a dollar-denominated contract for a peso-denominated contract. That type of negotiations are out of the desk. We can, of course, provide peso leases if -- because we will never be against the market. In the Mexico City market, which is the market that is more exposed to these conditions, we already have 52% of our leases which are peso-denominated leases. We have important customers, multinational customers that they do prefer to establish their operations in dollars as rent is not the most important component of their costs. And for them, it's easy to manage a budget and to manage operations. So there will be an increase on request. There might be a slightly increase on the peso leases that we will end up having. Peso leases as we have mentioned in the past are 5% more expensive than dollar-denominated leases and peso leases very rapidly catch up to the current FX conditions. So we end up with a marginal number of additional peso leases, I see that as a positive situation because we will end up receiving more money through this.

Regarding property tax. A property tax is a municipality tax. And now one thing that we have always faced in our business is that the criteria that the different municipalities have to face this situation is completely different. We don't see a call in which this municipal tax is going to be switched to become a federal tax. That would be very complicated for the government to take care of. And we do see and we experience, and we are used to dealing with this type of situation. Every time that there is a change on the major of different municipalities, different criterias and different quotes on property tax appear. We have a complete team incorporate dealing with this time of property tax situation. And what has resultantly become very efficient is that we gather between the local developers and local landlords to try to make block negotiations with a different municipalities. This structure has worked in the past. And I don't see that this will be modified because it has been working for both, for the municipality and for landlords.

[Operator]

And our next question is going to come from the line of Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

Sorry if I missed it from earlier, but did you give any details regarding effective rent changes by market? How were the dynamics in each of the main markets? And the other question that I have is regarding the current situation with a rent relief. Have you identified any tenant that could ask for early termination of contracts? Do you see that kind of profile within your portfolio?

[Hector Ibarzabal, executive]

Vanessa, let me start by the second part of your question. We have 327 contracts and 222 customers because we have some customers that have several contracts. 85% of our customers are multinational companies. And multinational companies and larger companies, it is the fact that we have identified that they are performing much better than the small companies. I do see that we will end up providing some rent relief. This rent relief is going to be moving from 1 month to 3 months depending on the feasibility of our customers. So far, out of the 327 contracts that I mentioned, we have only identified 3 customers whose business was already facing difficult times before the pandemic situation. And with the pandemic situation, their operations might be very complicated. We identified the situation with the customers, but we tried to facilitate the exit of the contract. But we have not received any request from our customer trying to cancel the business that they have with us.

As it was presented in our supplemental, we experienced pretty good rent change within the first quarter, 6.6%. We have reviewed our budget, and we expect that for year-end dollar-denominated terms, the final rent change is going to be even above what we are presenting in this year's plan. We feel very positive about this, and we have done 56% of revenue of our wallets.

Let me try to describe market by market what is happening. Mexico City market, which is the most active market, logistics and e-commerce companies are very active. Some of the customers that have a different profile of customers which are not engaged with the essential products for food and beverage are presenting a slowdown on their activities. But the same way we look for diversification, our multinational logistics operators, they focus a lot as well on having a diversified customer base. I got to mention that most of them, they have exposure to different type of industries. So I do see that the Mexico City market even though it's experiencing this effect situation because it's a peso-generated business, I think that will end up having midterm pretty good activity. The Guadalajara market is very active on supply. And we have seen multinational e-commerce players trying to operate very aggressively into such markets. I think that Guadalajara market has a strategic position to try to serve on their e-commerce perspective or the regional Bajio market. And this is a strategy that's important e-commerce players are following. We already mentioned the benefit that the FX and the near-shoring situation, which represent in our border markets. And in the border markets, our main focus is related to try to keep healthy operations within our part. We're supporting our customers with the best practices to try to accomplish with this. This is a sensitive situation that we monitor every day at the end of the day.

And finally, Queretaro is a hybrid market that as well keeps on experiencing important activity. There is several B2C projects as we speak that are pursuing the Monterrey market. And I think that the Monterrey market will keep a similar dynamic than what it has in the past.

[Operator]

And our next question is going to come from the line of Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

I have 2 questions. One is on the -- on your guidance. When we look at the -- on the FFO, the range in the low versus the high, there's a 14% difference, and it was previously only 4%. Can you just explain what is embedded on the high end of your guidance? Is this related to the potential average peso for the year? Or is it based on occupancy? And the second question is on your new guidance on same-store NOI, can you tell us what is your expectation on same-store sales NOI on the U.S. dollar-denominated rents?

[Jorge Girault, executive]

Thank you, Adrian, for your question. Regarding guidance, and this takes into account, I guess, both of your questions. As I said earlier, the FFO is being affected by 3 things basically. One is FX. Yes, we have a 14% decrease in FFO, but we had a 28% increase in FX. Obviously, we have about 35% of our incoming revenue in pesos. Two, as I mentioned and Hector also mentioned something about that some clients are going to go into trouble given the COVID. So we increased our AR from 1.5% to 3%, which will have a direct impact in our FFO. And third, I mean, the old number is behind, it is what is hitting or affecting the FFO and NOI for that matter. We expect, I mean, as Hector said, some clients are asking for pesos when we have reevaluation. Difficult to say where this number will end in the year. But right now, we have 65% of dollars and that's more or less what you should see in the NOI part of the equation.

[Luis Gutierrez, executive]

Yes. I mean on the second part, basically, we think rents will be flat in U.S. dollar terms for the year. So that is market rents. In terms of our rent change, I think a rent change on our portfolio will be a similar number than what we posted in Q1 for the rest of the year.

[Operator]

And our next question is going to come from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

I'm sorry if this was already answered. What about the shape of distributions? I mean you mentioned that your payout ratio will be in the range of the mid-80s. But I'm curious about the shape of the solutions going forward. Are you planning to use -- probably we will see lower distributions in the second quarter and perhaps a higher distributions in the third and the fourth quarter as those deferrals get paid?

[Jorge Girault, executive]

Paco, the shape of the distributions are going to be even as we have done it in the past for the next 3 quarters. So we already distributed $23 million through investors. Our -- going forward, the round number is about $17 million per quarter to get to the $0.097 on an annual basis.

We're running a little bit over the hour. We will take another call and if there is questions -- another question. If there is any further questions, we will take them individually.

[Operator]

Our final question today will then come from the line of Alan Macias, Bank of America.

[Alan Macias, analyst]

And just very quickly, one question regarding expenses. Have you seen any increases basically on electricity? Or have you seen any need to beef up your security needs?

[Hector Ibarzabal, executive]

Alan, no. We have not seen any important increase in expenses. Our security processes, I think that they do work for this type of situations. And the only thing that we have incorporated in several of our facilities are sanitization facilities. So people at the entrance of the park could wash their hands, and we -- some have isolated or keeping the distance as they are entering into the park.

[Operator]

I would now like to turn the conference call over to Luis Gutierrez for closing comments.

[Luis Gutierrez, executive]

Thank you very much, everyone, for your participation this morning, and please keep safe. We're optimistic this pandemic will end. We feel good about our business, and we are well positioned to take advantage of opportunities created by this stay home economy and near-shoring. Please feel free to contact us and see you on the next call. Thank you.

[Operator]

Once again, we'd like to thank you for participating on today's FIBRA Prologis quarterly conference call. You may now disconnect.