Mexico Real Estate: From Green Light to Red for FIBRAs

By David De La Rosa, Senior Vice President of Advisory & Consulting, Green Street Advisors: What do current REIT valuations in Mexico mean for private owners?

David-De-La-Rosa2FIBRAs, the Mexico equivalent of U.S. REITs, were in growth mode after their introduction to the Mexico capital markets in 2011. The industry grew from one company with a market cap of $300 million to 10 companies with a total market cap of $18 billion. At the onset, investors were enamored with the prospects for the FIBRA market and awarded companies with a lower capital cost relative to private companies. Consequently, FIBRAs became the natural buyer of many large real estate portfolios.

As a result of the positive return performance from 2011 to 2014, FIBRAs attracted capital to grow their portfolios. The industry raised about $6.5 billion through follow-on offerings, primarily in the form of blind pools. In such cases, capital raised was earmarked for future acquisitions yet to be identified. With most of the companies trading at premiums to their net asset values (NAVs), raising equity to buy real estate was a value-creating endeavor for shareholders.

The success of the FIBRA industry not only benefited its investors but also owners of private real estate portfolios. With a listed real estate market, private owners were offered strategic options for their portfolios that weren’t previously available, including forming a new FIBRA or selling assets to an existing one. Private operators like Mexico Retail Properties, FINSA and Prudential Real Estate Investors, among others, took advantage of these options to create value for their shareholders. Today, FIBRAs are owners of some of the highest-quality real estate acquired when the industry had the green light to grow.

DDR_Fibra-Market-CapThe FIBRA industry celebrates its five-year anniversary in March, and while still a success story for the Mexico capital markets, the last year has been a bumpier ride for the sector. The listed real estate market for U.S. REITs has turned, and many FIBRAs have seen their share prices drop to all-time lows. As a result, FIBRAs, on average, are trading at sizable discounts to their NAVs. This means that their cost of capital is more expensive and FIBRAS are not likely to tap the equity markets to grow. Not surprisingly, FIBRA equity offerings largely came to a halt in 2015.

Interestingly, some FIBRAs have taken notice of their discounted share prices and announced plans to explore share buybacks. In October 2015, FIBRA Uno, the largest FIBRA, announced plans to launch a $300 million share buyback program. Last month, FIBRA Prologis stated during a conference call it would be open to share buybacks. If discounts in the market persist, other FIBRAs will likely take notice of the value creation opportunity of buying back their own shares, especially if the tax authorities clarify share buyback rules.

So what does a red light on FIBRA growth mean for the owners of private real estate in Mexico? FIBRAs will not likely be aggressive acquirers in 2016. Private operators looking to sell their portfolios may find the auction tents less crowded and may see values potentially decline in the near future. Additionally, pursuing a public listing likely makes less sense, since public investors are only willing to pay 85 cents for $1 worth of real estate. However, despite the current state of the FIBRA market, private operators should constantly monitor the cost of capital for the sector. When the green light on growth is back on for FIBRAS, private owners will have more strategic options available for their portfolios.

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