Description

In a market without many clearly undervalued stocks anywhere in the world, Fibra Uno looks as good as anything available.  It is an industry leader, cheap, with catalysts, the balance sheet is reasonable and it has a 6.8% dividend yield.  The catch is it’s in Mexico, which might not be such a bad thing as the reason the stock is down is macro and we believe that impact is inflecting.

Ever wonder what REITs would look like after a 300 bp increase in central bank interest rates?  Look south and you’ll see.  The stock is down about 25% in local currency in 18 months.  They are not alone - all Mexican REITs are down significantly. 

Fibra Uno is the largest Mexican REIT, at $5.9bn USD market cap.   The company owns and operates a portfolio of assets composed of Retail (56%), Industrial (25%), Office (19%).  The balance sheet is quite strong for a real estate company.  Leverage is only 33% LTV going up to ~36% after adding the new assets, which is conservative.

FibraUno currently trades at 6.7% implied cap rate, 15.7x P/FFO, ~6.7% dividend yield, 20% NAV discount.  Outside of the big NAV discount, other valuation metrics are ok, not great, but these valuation numbers are missing the incremental Revenue and NOI coming from current developments and acquisitions (announced but not closed yet).

Properties currently under development or being acquired will hit the income statement in the next five quarters, by the end of 2018.   We estimate that Proforma NOI and FFO go up 50%, putting valuation at 8.0% implied cap rate, and 9.4% implied dividend yield.  If you own valuations that look like that in real estate you must like second tier U.S. malls more than we do. 

It seems unlikely to us that the stock price would stay where it is as these projects deliver the higher earnings and dividend.

Furthermore, we expect Mexican interest rates have topped out.   The central bank raised rates 300 bp in a short time to defend the currency which was injecting inflation into the economy.  The currency has stabilized.  We believe growth should pick up, and a major change to NAFTA is increasingly unlikely.

We expect the Mexican central bank to begin cutting rates soon, which would be a positive catalyst for this sector.   FibraUno has about 30% of debt at floating rate which would reduce interest expense.  The biggest benefit would come from the improved investor sentiment towards this “bond-like” asset class.    

We view FibraUno shares as very attractive at these levels.  We believe the shares should trade up to at least Ps 40.00 in the near/medium term, with value creation possibly north of Ps 50 longer term plus a 7% dividend. 

The views expressed are those of the author and do not necessarily represent the views of any other person.  The information herein is obtained from public sources believed to be accurate, reliable and current as of the date of writing.  The author will not undertake to supplement, update or revise such information at a later date.  The author may hold a position in the securities discussed.

Catalyst

Inflection in Mexican interest rates

Delivery of new projects